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                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C. 20549

                             ---------------------

                                   FORM 10-K

        [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                              SECURITIES ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

        [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                            THE SECURITIES ACT OF 1934

                    FOR THE TRANSITION PERIOD FROM        TO

                         COMMISSION FILE NUMBER 0-19606

                             AMERICAN BIOMED, INC.
             (Exact name of registrant as specified in its charter)

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                    DELAWARE                                        76-0136574
        (State of other jurisdiction of                          (I.R.S. Employer
         Incorporation or organization)                        Identification No.)
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        10077 GROGAN'S MILL ROAD, SUITE 100, THE WOODLANDS, TEXAS 77380
               (Address of principal executive office) (Zip Code)

                                 (281) 367-3895
              (Registrant's telephone number including area code)

          Securities registered pursuant to Section 12(b) of the Act:

          Securities registered pursuant to Section 12(g) of the Act:
                         COMMON STOCK, $.001 PAR VALUE
                                (TITLE OF CLASS)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [ ]

     The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 2, 1998, was $6,740,533.

     The number of outstanding shares of Common Stock, $.001 par value, of the
registrant was 19,732,351 shares as of March 2, 1998.

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                               TABLE OF CONTENTS

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                                    PART I
ITEM 1.     BUSINESS....................................................    2
ITEM 2.     PROPERTIES..................................................   19
ITEM 3.     LEGAL PROCEEDINGS...........................................   19
ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........   20

                                   PART II

ITEM 5.     MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
            MATTERS.....................................................   20
ITEM 6.     SELECTED FINANCIAL DATA.....................................   21
ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS...................................   22
ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................   26
ITEM 9.     DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........   26

                                   PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........   26
ITEM 11.    EXECUTIVE COMPENSATION......................................   28
ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT..................................................   30
ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............   30

                                   PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
            8-K.........................................................   33
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                                     PART I

ITEM 1. BUSINESS

 Cautionary Statement For Purposes of The "Safe Harbor" Provisions Of The
 Private Securities Litigation Reform Act of 1995

     American BioMed, Inc. is including the following cautionary statement in
this Annual Report on Form 10-K to make applicable and take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
for any forward-looking statement made by, or on behalf of, the Company. The
factors identified in this cautionary statement are important factors (but not
necessarily all important factors) that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, the Company.

     The statements contained in all parts of this document regarding future
business activities, products and product developments, financial performance,
future regulatory approvals, business strategies, market acceptance, business
arrangements, and results and other statements which are not historical facts
are forward-looking statements that involve risks and uncertainties, including,
but not limited to, those relating to: (i) the Company's business strategy; (ii)
the intention to contract with other organizations for the research, development
and, if applicable, registration of product candidates, and to seek joint
development or licensing arrangements; (iii) the research or development of
particular products or technologies; (iv) anticipated results of such
development activities and related clinical trials or of required regulatory
approvals; and (v) the reliance on collaborative partners for development,
regulatory or marketing activities. Many important factors affect the Company's
ability to achieve the stated outcomes and to successfully develop and
commercialize its product candidates, including, among other things, the ability
to: (i) obtain substantial additional funds; (ii) obtain and maintain all
necessary patents or licenses; (iii) demonstrate the safety and efficacy of
product candidates at each stage of development; (iv) meet applicable regulatory
standards and receive required regulatory approvals; (v) produce product
candidates in commercial quantities at reasonable costs; (vi) compete
successfully against other products; and (vii) market products in a profitable
manner. As a result, there also can be no assurance that the forward-looking
statements included herein will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.

GENERAL

     American BioMed, Inc., including its wholly-owned subsidiary, (the
"Company"), a development stage enterprise, is engaged in the development,
manufacture and marketing of medical devices. The Company's primary technology
is directed at interventional cardiology, endovascular surgery and minimally
invasive surgical devices. The principal products are atherectomy catheters,
stents, clot filters, 100% silicone balloon catheters and drug delivery catheter
systems. The Company's primary business strategy is to design and develop
minimally invasive medical devices to treat atherosclerotic disease. The Company
holds patents on its OmniCath(R) atherectomy catheter, a device that
mechanically removes the atherosclerotic disease ("plaque") from within blood
vessels or other synthetic implanted vessel devices. The Company also has patent
and/or proprietary rights to stent devices, the OmniStent(TM) and the
OmniFilter, a catheter-mounted temporary blood filter. These devices are
implantable within the vessel of the body to maintain an open lumen allowing
necessary rates of blood flow.

     The third product area, 100%-silicone balloon catheters, is protected by a
series of patents for the ten 510(k) product approvals which the Company is
currently marketing. The Company's subsidiary, Cathlab Corporation ("Cathlab"),
manufactures and markets a series of non-angioplasty 100%-silicone balloon
catheter products. These products are used to remove arterial blockages and
gallstones, to measure the cardiac output of the heart (through thermodilution)
and to angioscopically view the interior of the blood vessel.

     The fourth product area is a toposcopic catheter, the Evert-O-Cath(TM) a
drug delivery catheter which is used to precisely inject fluids or drugs to the
lesion or diseased area. This product group is also protected by

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patents and has 510(k) approval for sale in the U.S. It is believed that
drugs/coatings applied to the treated disease site will further reduce the
incidence of restenosis as coatings should allow for a smoother artery lining
after an atherectomy or stent procedure. The clinical success objective of
interventional cardiologists, radiologists and vascular surgeons in treating
atherosclerosis is to facilitate an acceptable rate of blood flow through the
vessel and to eliminate or minimize subsequent reoccurrence of plaque re-buildup
(restenosis).

     Efforts are underway to bring the Company's core technologies to market.
The Company received Institutional Review Board (IRB) approval at the University
of California at Los Angeles authorizing the start of Phase II human clinical
trials for the OmniCath(R) peripheral atherectomy catheter to begin in August
1996. The clinical trials at UCLA commenced August 1, 1996 and are temporarily
suspended as the Company has filed an amended protocol with the FDA for the
peripheral indication. The Company expects these clinical trials to be resumed
during the second quarter of 1998 and submission to the FDA approximately 18
months later. Currently the Company has eight clinical sites and intends to
expand the number of sites to 10 in 1998.

     In addition, the Company filed an Investigative Device Exemption (IDE) with
the FDA in February 1997 to conduct human clinical trials for its OmniCath(R)
atherectomy catheter for hemodialysis A-V fistula restenosis and expects to
receive this approval to start the trials in the second quarter of 1998. These
clinical trials will be conducted in parallel with the ongoing peripheral
clinical trials. The Company anticipates completion of these trials before the
end of 1999 and hopes to make an FDA submission in the U.S. within six months
after conclusion of the clinical trials.

     The Company is moving forward in its efforts to commercialize its
OmniStent(TM) and stent delivery system technologies. Management hopes to start
clinical trials for these products within twelve months. The Company will
require significant additional financing to fund the clinical trials for
OmniCath(R), OmniStent(TM) and all its other products which require approval of
the FDA. (See "Item 7 -- Liquidity and Capital Resources.")

INDUSTRY BACKGROUND

  Interventional Cardiology and Endovascular Surgery

     Over 65 million Americans suffer from some form of coronary or peripheral
vascular disease. The most noted of these diseases is cardiovascular. This
disease is progressive and degenerative, and is characterized by a buildup of
fatty materials ("plaque") within the lining of the arterial blood vessels. The
buildup of plaque results in an obstruction (stenosis) that reduces blood flow
through the arteries and may eventually lead to total blockage causing tissue
damage and death. The plaque forms at varying degrees of hardness, eccentrically
or concentrically within the artery, reducing the elastic nature of the vessel
and thereby compromising the vessel's ability to efficiently pump blood to vital
organs.

     Despite significant advances in product technologies, the disease continues
to be the leading cause of mortality in the U.S. today. Degenerative
atherosclerotic narrowing of the arteries that feed the heart ("coronary
arteries"), known as coronary heart disease, afflicts over six million persons
in the U.S. alone. It is largely responsible for approximately 1.5 million
"heart attacks" each year in the U.S., of which approximately 500,000 result in
death. Atherosclerosis also affects arteries in the kidneys ("renal arteries")
and in the abdomen, groin and legs ("peripheral arteries") and is a leading
cause of strokes, reno-vascular hypertension (a type of high blood pressure) and
peripheral vascular disease.

     Prior to the late 1960's, pharmaceuticals represented the most common form
of treatment for coronary heart disease and other forms of atherosclerosis.
While often effective in alleviating many symptoms, pharmaceuticals did not
address the underlying problems of narrowed arteries and reduced blood flow.
During the late 1960's, cardiovascular surgeons pioneered a new type of open
heart surgery that grafted a blood vessel from the patient's leg to the diseased
coronary artery to bypass the blockage, thereby providing a longer-term
treatment, but one that was highly invasive, costly and required a lengthy
hospital stay. Today, bypass graft surgeries of the coronary arteries and of
other peripheral vessels account for over 600,000 procedures annually in the
United States. Bypass surgery generally is performed when the patient displays
extensive deposits of atherosclerotic plaque throughout the length of one or
more vessels thereby rendering impractical the

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attempted opening ("dilating") of the blocked ("occluded") arteries due to the
procedural time required, the critical location of the occlusion, or the
inability to safely access the blockage.

     In the late 1970's, cardiologists developed a less-invasive method of
treating atherosclerosis, the method known as balloon angioplasty. In its
simplest form, balloon angioplasty involves threading a small balloon-tipped
catheter through the arterial system to the site of the blockage. The balloon is
inflated, dilating the vessel and thereby displacing the plaque by pressing it
against the artery wall. The arterial opening is thereby enlarged, restoring
blood flow.

     There are inherent risks in balloon angioplasty, including vessel
dissection, acute closure due to overstretching of the vessel, and the potential
that small pieces of plaque will break off and move downstream to block critical
parts of the blood vessel. The blood supply to critical heart tissue is
temporarily cut off while the balloon is inflated, increasing the risk of a
heart attack during the procedure. The balloon-dilated artery may spasm during
and/or immediately after the procedure and cut off the blood supply to critical
tissues. Balloon angioplasty is generally not considered suitable for patients
with extensive atherosclerosis nor for patients who suffer from very severe
blockages of arteries that supply large areas of the heart with blood.
Additionally, since the atherosclerotic plaque is not removed during the balloon
procedure and because certain damage to the inner lining of the arteries can
occur when the balloon is inflated, there is a high rate of re-blockage or
"restenosis" of the treated artery(ies).

     The limitations inherent in balloon angioplasty have created a significant
opportunity for alternative types of angioplasty devices, including stents and
atherectomy devices. A third method, lasers, has been shown to be damaging to
the arterial walls and now is used only for narrowly defined clinical
indications. Laser systems are expensive and require special facilities and
maintenance. Stents and atherectomy devices are rapidly becoming the growth
products in atherosclerotic procedures.

     The number of angioplasty (including atherectomy) procedures performed and
the market for coronary and peripheral angioplasty devices and accessories have
grown at a rapid rate as a result of a number of factors, including the general
aging of the world's population. Industry sources project the stent and
atherectomy device market to grow at a rate of 50% and 30% per annum,
respectively. Based upon such projections, stents would become a $750 million
business by 1998, while the sale of atherectomy devices would grow to $350
million in sales by 1998. Delivery catheters for coatings of the treated
stenosis is projected to be over $100 million by 1998.

PRODUCTS

  The OmniCath(R) Atherectomy Catheter

     The OmniCath(R) is an "atherectomy catheter," designed to allow physicians
to remove atherosclerotic plaque from obstructed blood vessels throughout the
body, enlarging the narrowed vessel openings and thereby restoring normal blood
flow. The Company is developing the OmniCath(R) with catheter shafts of several
different diameters for use in coronary arteries which feed the heart (5.8 to 7
French) and in peripheral arteries in the abdomen, groin and legs (7 French and
8 French). "French" is a measure of diameter, one French is equivalent to  1/3rd
of a millimeter. The OmniCath(R) is self-contained and disposable and is powered
by a small battery pack and motor assembly in the handle. Connected to the
handle is the catheter shaft which will vary in length depending on the distance
needed from insertion to the treatment site. The weight of the OmniCath(R) is
approximately 11 ounces.

     The OmniCath(R)'s shaft has a side-window and a small rotating cylindrical
blade near its distal end (the end of the catheter or farthest part of the
catheter which is inserted into the body). At the surface opposite the
side-window are two deflector wires which, when advanced against the arterial
wall opposite the plaque using controls in the handle, stabilize the catheter
shaft and allow the window to cover a larger volume of the plaque, compressing
it into the path of the rotating blade. Once the deflector wires are engaged and
the side window is in position, using controls on the OmniCath(R) handle, the
rotating blade can be advanced and retracted across the side-window at
approximately 11,000 RPM to shave the atherosclerotic plaque from the interior
surface of the vessel walls. The blade does not come into contact with the
non-diseased arterial walls during the

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atherectomy procedure. The shaved plaque is aspirated into an annular space in
the catheter and evacuated through a removal port at the proximal end of the
catheter (the end at the OmniCath(R) handle) via a vacuum system. This enables
the excised plaque to be collected and examined while the atherectomy is taking
place. There is very little loss of blood during the procedure as the
OmniCath(R) is designed to restrict the amount of blood which enters the
catheter system. Further, the blockage of blood circulation by an inflated
balloon, which often occurs in balloon angioplasty, does not occur in a
procedure using the OmniCath(R). The deflectable system which holds the catheter
in place is designed to allow for continuous blood flow. This allows more time
to complete a procedure although a procedure using the OmniCath(R) should
generally require less time than a procedure utilizing multiple balloon
inflations to break up the plaque. As opposed to balloon angioplasty, which
cracks and displaces plaque, the shaving mechanism of the OmniCath(R) removes
plaque and is designed to leave the artery clean and smooth, free of fissures,
ruptures, and flaps.

     Overall, the OmniCath(R) is designed for ease of use and provides the
physician with the capability to multiple lesion atherectomy procedures with a
single placement as opposed to the multiple placements often required with
balloon angioplasty and competitive atherectomy devices. The OmniCath(R)'s
features, including its lightweight and compact construction are designed to
provide a competitive advantage over existing atherectomy catheters. See "Item
1 -- Business -- Competition."

     The Company had commenced limited human clinical trials in the United
States with the 8 French OmniCath(R) for peripheral use. The device was
initially used on patients during 1991 and 1992. Although no adverse effects or
complications were observed or reported from the use of the OmniCath(R) on any
patient, the trials indicated that the OmniCath(R) needed certain modifications.
In July 1992, the Company contracted with an independent third party to conduct
a product design review of the OmniCath(R). Based on the results of that review,
improvements to the OmniCath(R) were made including increasing battery and motor
power for guiding the catheter through the body, strengthening the deflector
wires which hold the catheter in place, enhancing the cutter and debris-removal
system, and creating a better ergonomically profiled product for the end user.
The Company informed the FDA of the improvements in July 1992, and the FDA
requested additional information on the modifications before human clinical
testing could resume. The Company submitted the additional information and
received permission from the FDA to resume Phase I clinical trials in July 1993.
The Company completed its Phase I trials and submitted its data to FDA. The
Company received approval by the FDA for its Phase II peripheral OmniCath(R)
atherectomy clinical trials in 1995 and commenced Phase I on August 1, 1996 at
the University of California at Los Angeles. However, the clinical trials are
temporarily suspended as the Company has filed an amended protocol with the FDA.
The Company expects these clinical trials to be resumed during the second
quarter of 1998 and submission to the FDA approximately 18 months later.
Currently the Company has eight clinical sites and intends to expand the number
of sites to 10 in 1998.

     The Company has not yet applied for U.S. FDA approval of the OmniCath(R)
for coronary use but expects to file for investigative device exemption (IDE) at
the successful conclusion of the OmniCath(R) peripheral clinical trials. There
can be no assurance that required regulatory approvals will be received on a
timely basis or at all. See "Item 1 -- Business -- Government Regulation." The
Company received a Notice of Allowance from the U.S. Patent and Trademark Office
for its sixth patent for the OmniCath(R).

  The OmniStent(TM)

     Although angioplasty and atherectomy contributed greatly to less invasive
treatment of atherosclerosis, it was not until 1994 that a third less invasive
means of treatment was developed. This new means consists of simple spring-like
devices called stents which when placed in a treated vessel, greatly reduces
acute and chronic clinical failure rate of restenosis.

     Stents provide a foundation for support to a weakened vessel. The most
common design is the metal stent which comprises a tubular structure, normally
having a pattern of slots which when expanded produce a tiny tubular grillwork
which can hold a diseased vessel open, thereby providing a channel for blood
flow to the heart or limbs.

     It appears that the majority of flow-limiting lesions, whether in a duct
(biliary), tract (esophageal) or vessel (vascular stenosis, aneurysm,
arteriovenous shunts, etc.), are stent treatable. The stent is placed in a
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relatively conventional manner for angioplasty. The lesion is crossed with a
conventional guide wire, and the lesion is predilated using a conventional
balloon catheter; using the exchange technique, the delivery balloon catheter is
then advanced over the wire to the lesion being treated. At the site of the
lesion, initial inflation to 5-6 atm is carried out. To further imbed the coiled
stent into the subintimal layers of the arterial wall, higher inflation
pressures that expand the compliant delivery balloon to larger diameters are
then used.

     The OmniStent(TM) has been successfully manufactured using a unique,
patented proprietary process that makes a one piece, endless loop without
welding, soldering or annealing. The Company also has a proprietary process in
which it forms and shapes the stents prior to use. The Company is also looking
at metals other than stainless steel (which it has previously used) and is
designing its own delivery catheter which may use a variation of its
Evert-O-Cath(TM).

     The Company has patented two distinct stent configurations, the coil stent
and the bifurcated stent. The coil stent is a straight coil wound in helix which
would be used in supporting a longitudinal section of vessel such as a major
coronary vessel, (i.e., left anterior descending or right coronary artery or a
major peripheral vessel such as the aortic iliac or femoral). The coil is formed
from an endless loop of wire formed in a plurality of arcuate sections.

     The bifurcated OmniStent(TM) is a Y-shaped bifurcated stent designed for
use in aortic bifurcation. However, small versions may be used at any branched
blood vessel. The bifurcated version is also an endless stent overcoming the
deficiencies of prior art in construction. However, it is unique in design as no
other company has solved the dilemma of manufacturing and deploying a bifurcated
stent. All rely on a series of single stents, placed in close proximity, and
usually requiring an access from each artery (lateral and contralateral
femoral). This is very distressful to the patient requiring a surgical prep,
artery puncture and catheter sheath on each side of the groin. Potentially it is
twice as difficult, dangerous and time consuming to both patient and doctor as
the bifurcated OmniStent(TM). In addition, the Company has developed a process
of reproducing the stents using photoetching which significantly reduces cost
and production error.

     The Company's stent technology is protected by two patents, US Patent No.
5,342,387 issued August 30, 1994 titled Artificial Support for a Blood Vessel,
and US Patent No. 5,607,445 issued March 4, 1997 titled Method and Apparatus for
Making a Stent. In addition, on January 8, 1998 the Company received a Notice of
Allowance from the US Patent and Trademark Office for the Company's stent
delivery system. All patents are assigned to the Company.

     The Company's patent includes a proven biocompatible coating used to coat
the interior surface of artificial hearts. This neutralized collagen compound is
considered to be one of the most blood- and tissue-compatible biomaterials used
to construct a smooth blood flow around the device. When applied as a thin film
it provides a smooth, biochemically stable protein coating with non-pseudo
intimal properties, very little platelet adhesion, and high blood compatibility.
In addition, when used as a substrate, the coating bonds easily with various
anticoagulant molecules such as Heparin and phospholipids which are used to
further reduce thrombosis. The Company has developed a concept for covering its
stents with graft material and plans to file a patent on this process in the
future. The endoprosthesis will enable the Company to become active in the
endovascular graft market. The greatest advantage in using the endless loop,
self-expanding metals is the potential for generating mural pressures within a
stenosis sufficient for precise stent-vessel apposition.

     Once the vessel is acutely dilated, the stent could be passed through the
stenosis on a guide wire, in its endless, elongated configuration, then released
to allow the coils to reform at the stenosis. The gradual mural pressure of the
"memory" reforming coil produces a subsequent chronic vessel dilation over a
period of several hours or days until the "memory" diameter of the coil is
reached. This could greatly impact the restenosis problem in that the acute
trauma of angioplasty (i.e., rapid vessel wall stretching, dissection of
internal elastic lamina and media) could be modulated over the succeeding days
after angioplasty by gentle though constant vessel wall "remolding."

     The OmniStent(TM) has several advantages over competitive products. It is a
dual, endless coil which gives the stent versatility in using almost any
material; the dual coil gives more than two times the hoop strength of a single
coil; the continuous loop allows easy deployment whether on a balloon,
guidewire, or through a sheath

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(such as the Schneider Wallstent). When coiled, according to the reversible
arcuate sections (the preferred embodiment in US Patent 5,342,387), the open
sections can be used to place at vessel branches allowing open flow into these
branches. In addition, the patent claims a bifurcated stent made of the same
endless loop, that presents wide applications in peripheral stenting and grafts
(the aortoileal stenosis is the most common pathology in peripheral vascular
disease). The endless, bifurcated stent can thus be inserted into both iliac
vessels from a unilateral (one puncture) technique. It is the most versatile
stent in the interventional field.

     Although the Company intends to commercialize the OmniStent(TM) as quickly
as possible, the current regulatory climate at the FDA has made the approval
process extremely slow for new products. Therefore, there can be no assurances
that the product will be approved within a timeframe which will permit the
stents to contribute to the Company's need for short-term capital, nor can there
be any assurances that the FDA will ever approve the OmniStent(TM).

  The Evert-O-Cath(TM) Drug Delivery Catheter

     The Evert-O-Cath(TM) is a "toposcopic catheter" used to inject fluids and
drugs, such as thrombolytic agents (drugs that dissolve blood clots) and
chemotherapeutic agents, in the body in an extremely precise and localized
manner and to withdraw fluids from the body. The Evert-O-Cath(TM) features a
flexible and extremely soft-tipped catheter (the "primary catheter"), inside of
which lies a second, interior catheter known as a "topo" element. The thin and
flexible toposcopic catheter adapts to the contours of lumen permitting it to be
extended further into the body than a conventional catheter. The toposcopic
catheter also can be extended around near-total obstructions, causing less
friction and less damage to the lumen and allowing passage of the catheter
through tight strictures that, otherwise, would be unpassable. The
Evert-O-Cath(TM) is designed to be useful for reaching remote or extremely
fragile places in the body that, currently, are inaccessible to other catheters.

     The most applicable use of the Evert-O-Cath(TM) is in conjunction with
balloon angioplasty where it can be used to both dilate and deliver localized
drugs to the angioplasty site to modulate restenosis or thrombus formations.

     The Company is developing a dilating version of the Evert-O-Cath(TM) to
combine drug delivery with angioplasty. As an angioplasty catheter, the
Evert-O-Cath(TM) is expected to provide a method of extruding a drug delivery
balloon from the interior of a catheter. In addition, the eversion of the
balloon from within the Evert-O-Cath(TM) makes the placement through narrow and
tortuous blood vessels, such as saphenous vein grafts, much easier than with
conventional balloon catheters. This procedure, when used in fragile grafts,
should result in less abrasion to arterial walls, and fewer cases of downstream
blockage of the blood vessel by dislodged plaque. The everting balloon could
remain extruded continually during dilatation from the Evert-O-Cath(TM),
allowing perfusion through the lumen and thus making multiple and prolonged
dilations easy to perform without withdrawing the catheter from the vessel.

     A version of the Evert-O-Cath(TM) was approved by the FDA for certain
non-coronary applications in July 1994. The Company developed prototypes during
1994 and, based on feedback from potential users of the dilating
Evert-O-Cath(TM), the prototypes have been modified to better satisfy existing
medical needs. The Company intends to file a 510(k) Notification with the FDA
with respect to these modifications when the Company is convinced there is a
commercial market application for this product. There can be no assurance that a
favorable determination with respect to the Company's 510(k) Notification will
be obtained. See "Item 1. Business -- Government Regulation."

  The OmniFilter

     The Company is developing a percutaneous temporary filter which is mounted
on a guide wire and is used to prevent stroke-causing blood clots from reaching
various organs of the human body. The filter is deployed remotely, opened within
a vessel and then remotely closed, safely and reliably removed with clots intact
within a mesh filter containing the entrapped material. The size of the filter
is such that blood flow is not significantly reduced through straining, but
embolytic debris is caught and retained by the filter. On

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December 9, 1997 the Company received US Patent No. 5,695,519 titled
Percutaneous Filter for Carotid Angioplasty.

     The Company believes that the OmniFilter, which has not been submitted to
the FDA for approval, will find significant use in such emerging procedures as
percutaneous angioplasty and stenting for carotid arteries, acute lytic
procedures for limb salvage, and endoluminal stent grafting for such procedures
or endoluminal aortic abdominal aneurysm. There can be no assurances that the
product will be approved by the FDA. (See "Item 1. Business -- Government
Regulation.")

  Cathlab Catheters -- General

     The Company's Cathlab subsidiary has ten FDA approved balloon catheters,
seven of which are currently being marketed within the United States and abroad.
In addition, the Company has submitted a 510(k) Notification to the FDA for
approval of an infusion catheter. The 100%-silicone design of these catheters is
resistant to environmental factors, unaffected by body temperature, and more
biocompatible than latex balloons or polyvinyl chloride (PVC) tubing. The
patented one-piece balloon design eliminates glue and ties, providing superior
smoothness and preventing the possibility of balloon dislodgement.

     Allergy to latex has been increasingly recognized as a cause of
life-threatening intraoperative anaphylaxis (a systemic reaction). Frequent use
of latex in patients or by health care workers can result in sensitization that
may place some individuals at risk for such a life-threatening allergic
reaction. The 100%-silicone design of Cathlab's catheters negates the potential
risk of intraoperative anaphylaxis.

  Embolectomy and Bi-Lumen Catheters

     Cathlab manufactures and markets an embolectomy catheter, which is used in
procedures to remove arterial blockages, generally clotted blood but also
bacteria and other substances ("emboli"). The catheter is passed through a
surgical cutting or opening in an artery (an "arteriotomy"), along the artery,
and through any suspected emboli, with the balloon deflated. The balloon is then
inflated with saline solution and the embolus is removed by withdrawing the
catheter tip through the arteriotomy.

     Cathlab manufactures and markets a bi-lumen embolectomy and irrigation
catheter which is used to assist in the removal of clotted blood from inside a
vessel, as well as, to irrigate a vessel with saline or other drug solutions
during a surgical procedure.

  Ahn Thrombectomy Catheter

     The Company received 510(k) approval from the FDA in January 1998 for its
new, safer thrombectomy catheter for the treatment of thromboemboli, the removal
of clots from blood vessels. The product will be named after Dr. Samuel S. Ahn,
the product's developer and the Company's Chief Clinical Investigator. This
unique catheter incorporates a distal dual balloon design to more effectively
remove emboli, as well as a proximal safety balloon indicator which allows the
surgeon to visually determine inflation volume. A patent application has been
filed with the US Patent and Trademark Office for this product, and the Company
expects to launch the product in the second quarter of 1998.

  Occlusion Catheter

     Cathlab manufactures and markets an occlusion catheter which is used to
occlude the flow of blood in a vessel during a surgical procedure. Occlusion of
vessels during surgical procedures with a balloon catheter is much less
traumatic to the vessel than other methods of occlusion (i.e. clamps or
sutures).

  Thermodilution Catheter

     Cathlab manufactures and markets a thermodilution catheter which is used in
the assessment of a patient's hemodynamic condition (the efficiency of the heart
muscle) through direct intracardiac and pulmonary artery pressure monitoring and
cardiac output determination. This catheter is also used for blood sampling and
infusing solutions.
                                        8
<PAGE>   10

  Angiographic/Angioscopic Irrigation Catheter

     Cathlab manufactures and markets an angiographic/angioscopic irrigation
catheter which is used as a sheath for insertion of an appropriate size
angioscope to visually examine the interior of circulatory vessels. The
flexibility of this catheter permits its navigation through tortuous vessels of
the circulatory system. The variety of sizes and lengths of this catheter
provide compatibility with a variety of angioscopes.

  Biliary Catheter

     Cathlab manufactures and markets a biliary catheter which is used for the
removal of intraductal stones and debris from the biliary tree. Cathlab is
currently developing a biliary catheter for use during laparoscopic procedures.

  Cardiac-Assist Devices

     Angioplasty and other therapies involving the removal or displacement of
plaque from the arteries are intended to increase blood flow but do not relieve
the heart muscle ("myocardium") from its continual job of pumping blood
throughout the circulatory system. The Company holds four issue patents on a
cardiac-assist pump for future development of cardiac-assist devices which have
the basic objective of assisting the myocardium in moving blood through the body
at a physiologically acceptable rate. The Company has no plans to develop these
pumps at the present time and is a prime candidate for divestiture.

  Spinal Dissector

     The Company has patented and developed prototypes of minimally invasive
devices for use in spinal surgery, which have been evaluated in vivo. In August
1994, the Company licensed its "Spinal Dissector" spinal instrument to Wright
Medical Technology, Inc. for a license fee of $300,000 plus royalties. This
device is used for both anterior and posterior lumbar disc decompression
procedures.

SCIENTIFIC ADVISORY BOARD

     American BioMed, Inc. has established relationships with outside scientific
advisors and views access to such advisors as an important resource. The
advisors counsel the Company with respect to its research and development
programs, new technological advances and medical requirements. The Company's
Scientific Advisory Board was reformulated in February 1996 and the advisors
are:

     SAMUEL S. AHN, M.D., F.A.C.S. -- Dr. Ahn has served as Chief Clinical
Advisor to the Company since January 1996. Dr. Ahn is Associate Clinical
Professor of Surgery at the University of California at Los Angeles. He serves
on the editorial board of the Journal of Vascular Surgery, and is a reviewer or
guest reviewer for Surgery, Arteriosclerosis, Thrombosis and Vascular Biology,
Journal of Endovascular Surgery, Annals of Vascular Surgery, Vascular Surgery,
and others. He is author or co-author of over 70 peer review articles, a
visiting professor at University of Louisville; Yonsei University, Seoul, Korea;
University of Ulm, Ulm, Germany; Ultrech Hospital, Ultrech, Netherlands; Ochsner
Clinic and others. He holds membership in the American Medical Association,
Association for Academic Surgery, American College of Surgeons (Fellow), Western
Vascular Society, Los Angeles Surgical Society, etc.

     LARRY STUART-DEUTSCH, M.D. -- Dr. Deutsch is Professor and Chief of
Vascular and Interventional Radiology at the University of California at Irvine.
He is a Research Radiologist and is involved in numerous scientific projects.

     DARWIN ETON, M.D., F.A.C.S. -- Dr. Eton is Associate Professor of Surgery
at the University of Southern California, Los Angeles, with major research
activities in gene therapy of intimal hyperplasia, stented vascular grafts and
approaches to less invasive aortic surgery with laparoscopic instrumentation.

     LAWRENCE A. YEATMAN, M.D., F.A.C.C. -- Dr. Yeatman is Professor of
Cardiology and Chief of Cardiac CathLab at University of California at Los
Angeles Medical Center is the Company's advisor regarding coronary applications
for the OmniCath(R) and OmniStent(TM).

                                        9
<PAGE>   11

     DAVID A. LEE, M.D. -- Dr. Lee is Associate Professor of Ophthalmology and
Director of Tissue Culture Laboratory at University of California at Los Angeles
Medical Center, and Chief of Glaucoma Division at Jules Stein Eye Institute. For
many years he has specialized in experimental and clinical ocular pharmacology
and pharmaceutics. He will lead the investigations of molecular and cellular
reactions to the Company's products.

     J. PATRICK JOHNSON, M.D. -- Dr. Johnson is Associate Professor of
Neurosurgery at the University of California at Los Angeles, and a director of
the Comprehensive Spine Center. He specializes in spine, nerve roots and the
spinal cord. Dr. Johnson advises the Company regarding its MIS Spinal Dissector
and Needlescope products.

     RICHARD STOUT, M.D. -- Dr. Stout is a professional clinical and regulatory
affairs consultant in the medical device field. He reviews, comments and advises
the Company on all FDA, Enzyme Commission and other regulatory matters.

MARKETING PLANS AND ARRANGEMENTS

     The Company is focused on increasing the exposure in the market place for
the Company's proprietary products and technologies. The identification and
selection of qualified distributorships, both international and domestic
markets, will be a key component to this strategy. The Company has embarked on
an ambitious search to find qualified specialty distributors with the necessary
resources to professionally promote its products in their respective geographic
territories. Since November 1997 five industry-respected specialty distributors
have been added to the domestic distributor network. The newly appointed
distributors have placed initial stocking orders and are in the process of
completing their initial product orientation and product training for the
Company's complete product portfolio. Complete geographic coverage of the
domestic market should be accomplished by August 1998.

     The following summary indicates the Company's percentage of sales within
geographic regions for the years 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                        REGION                           1997    1996    1995
                        ------                           ----    ----    ----
<S>                                                      <C>     <C>     <C>
United States..........................................  34.5    45.5    18.7
Italy..................................................  16.9    18.7    24.9
South America..........................................  12.0    17.0     -0-
Other European Countries...............................  15.7    12.1    39.6
Other..................................................  20.9     7.7    16.8
</TABLE>

     Supporting the Company's domestic distributors will be a network of
independent manufacture representatives. These representatives will be
compensated by commission on actual sales and will be the liaison and marketing
support to our rapidly growing distributor network. Management believes by
bringing the sales and marketing support to the field level, the Company will
enhance customer service support to both the distributor and to end user
customers. The Company's application engineers and clinical support personnel
will supplement the efforts of the manufacturer's sales representative and
distributors by providing all customers with in-service training and product
education. Management will continue to attend key industry symposiums and
conventions where the concentrated exposure to important decision-makers can be
achieved and enhance the marketing visibility of our products. Journal
advertising, strategic mailings, and sponsorship of academic-based research
articles are planned for 1998 to support the Company's sales efforts.

     The Company selected four new international distributors during the fourth
quarter of 1997. These distributors, three in Europe and one in Japan, have
placed initial stocking orders and are currently promoting the Company's product
line in their respective countries. The addition of these distributors brings
the total number of international distributors to twelve. The Company plans to
add up to fifteen international distributorships during calendar year 1998 in
targeted global markets where the Company's products are currently not
represented.

                                       10
<PAGE>   12

     Augmenting the distribution strategy will be a focused effort on securing
Group Purchasing Organization ("GPO") contracts. Securing these contracts with
GPO's like the Premier Group, a GPO representing more than fifteen hundred
hospitals, is key to achieving rapid success in the marketplace. The Company is
currently in negotiations with numerous GPO's to secure contracts with these
groups because of its unique product offerings and competitive pricing.

     The Company received ISO 9001 certification January 12, 1998. In February
1998 the Company entered into an OEM agreement with Polamedco, Inc. to
manufacture up to 300,000 units annually of Polamedco's nasopharyngeal airway
products in assorted sizes. Polamedco represents the Company's first OEM
contract and is a direct result of the Company's receipt of ISO 9001
certification. By securing suitable OEM arrangements, the Company hopes to
achieve greater marketing coverage while maintaining sales increases with its
distributor network. The Company is currently in discussions with other medical
manufacturers/strategic partners for OEM distribution of the Company's products.
In addition, the Company is pursuing private label opportunities to provide OEM
manufacturing for existing products and products not currently manufactured but
that capitalize on the Company's existing silicone technologies.

     The Company is uncertain today that the distributors now in place will be
able to effectively market and sell the Company's core product technologies, the
OmniCath(R), OmniStent(TM) and Evert-O-Cath(TM). As such, the Company has
undertaken efforts to identify healthcare companies with similar technologies or
companies seeking new proprietary products to strengthen their existing market
position. This strategy is directed toward the formation of strategic alliances,
joint venture arrangements, licensing and distributor agreements, and research
and development agreements/projects. An integral part of this strategy is to
aggressively pursue the sale of ancillary technologies (not core technologies)
which will enable the Company to focus its resources exclusively on its core
technologies and commercial non-angioplasty balloon catheter products.

     The Company has begun formulating a comprehensive marketing and sales
strategy and has determined that the most expeditious and cost-effective method
of marketing the OmniCath(R) is to ally itself with a strategic partner whose
marketing and distribution networks are global in scope and is selling to
healthcare providers who are high volume users of angioplasty, atherectomy and
stent devices. By selecting one or more strategic partners, the Company can
focus its efforts on manufacturing, product development and securing regulatory
approvals while the strategic partner or partners can focus on selling with
their existing, experienced sales organizations. The Company is currently
marketing the OmniCath(R) in selected international markets through existing
Cathlab distributors and will continue to do so until the Company gains FDA
approval for U.S. sales and/or strategic partners are selected.

     However, there can be no assurance that these OEM and private label
opportunities or the Company's efforts to secure distributors and GPO contracts
will result in contracts and subsequent revenue to the Company. Many of these
potential strategic partners bring with them the added benefits of GPO contracts
and the advantage of the bundling of products to the end user, thereby
increasing the visibility of our products in the global marketplace.

GOVERNMENT REGULATION

     The catheters and stent devices which have been and are being developed by
the Company (and any products intended to be researched, developed or marketed
in the future) are all medical devices subject to regulation by the FDA.
Pursuant to the Federal Food, Drug, and Cosmetic Act and regulations promulgated
thereunder (the "FDC Act"), the FDA regulates and must approve the manufacture,
distribution and promotion of medical devices in the United States. Various
states and foreign countries in which the Company's products may be sold in the
future may impose additional regulatory requirements.

     If the manufacturer or distributor of medical devices can establish that a
proposed device is "substantially equivalent" to a device that is legally
marketed, the manufacturer or distributor may seek FDA marketing clearance for
the device by filing a "510(k) Notification." The 510(k) Notification and the
claim of substantial equivalence must be supported by various types of data and
materials, including test results. Following submission of the 510(k)
Notification, the manufacturer or distributor may not place the device into
commercial distribution until an order is issued by the FDA. The order is
generally sent within 90 days of
                                       11
<PAGE>   13

the submission and the order may declare the FDA's determination that the device
is substantially equivalent to another legally marketed device and allow the
proposed device to be marketed in the United States. The FDA may, however,
determine that the proposed device is not substantially equivalent, or may
require further information, such as additional test data, before the FDA is
able to make a determination regarding substantial equivalence.

     If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent, whether or not the FDA has made a
determination in response to a 510(k) Notification, the manufacturer or
distributor will have to seek "premarket approval" of the proposed device. A
premarket approval application would be submitted supported by extensive data,
including preclinical and human clinical trial data, as well as extensive
literature, to provide recommendations to the FDA. While the FDA has responded
to 510(k) Notifications and premarket approval applications ("PMAs") within the
allotted time period, reviews more often than not occur over a significantly
protracted time period, usually 12 to 18 months for a PMA, and possibly as much
as a year or more for certain 510(k) Notifications supported by clinical data. A
number of devices have never been cleared for marketing under either the PMA or
510(k) Notification process.

     If human clinical trials of a proposed device are required and the device
presents significant risk, the manufacturer or distributor of the device will
have to file an Investigational Device Exemption ("IDE") application with the
FDA prior to commencing human clinical trials. The IDE application must be
supported by data, including the results of animal and mechanical testing. If
the IDE application is approved, human clinical trials may begin.

     In June 1991, the Company's IDE application with respect to the OmniCath(R)
for peripheral use was approved allowing the Company to commence limited human
clinical trials with one physician investigator at one institution, who could
use the device on a total of ten patients to mechanically remove accumulations
of plaque from peripheral arteries. During 1992, an additional institution was
approved by the FDA to conduct human clinical trials. The Company concluded
Phase I of the IDE as approved by the FDA and submitted an IDE Supplement to the
FDA in August 1994. The Supplement contained the clinical data (generated on 12
patients) which demonstrated the performance of the device. The Company was
granted conditional approval by the FDA to expand the clinical trials in the
United States for peripheral vessels. To date, the OmniCath(R) device has been
used, domestically and internationally, on more than 60 patients. The Company
must accumulate case study data on at least 50 patients for the peripheral
trials and have follow-up for at least six months, before the 510(k)
Notification can be prepared and initially filed. With respect to the
OmniCath(R) for hemodialysis A-V fistula restenosis, clinical trials represent
an expansion from peripheral applications of the OmniCath(R) to include A-V
grafts. Animal studies have been completed to demonstrate safety and to provide
the basis of efficacy in debulking A-V grafts in hemodialysis patients. It is
anticipated that these clinical trials will be completed before the end of 1999
and FDA 510(k) submission is anticipated three months after completion of the
required number of clinical trial cases.

     By virtue of the additional risk associated with the use of a mechanical
catheter in the arteries of the heart, the OmniCath(R) for coronary application,
presently under development, will require more extensive animal and mechanical
testing than did the peripheral OmniCath(R) before an IDE application can be
filed and human clinical trials undertaken. The Company does not intend to
pursue the coronary application until the peripheral and A-V fistula indications
are approved by the FDA.

     The Evert-O-Cath(TM) was cleared to market by the FDA for certain
non-coronary applications (see previous discussion under "General"). The Company
developed prototypes during the fourth quarter of 1991 and, based on feedback
from potential users of the Evert-O-Cath(TM), the prototypes were modified to
better satisfy medical needs. The Company received clearance from the FDA to
market the Evert-O-Cath(TM) commercially in July 1994. The Company is developing
a therapeutic version of the Evert-O-Cath(TM) for angioplasty applications and
expects that mechanical, animal and human testing and follow-up will be required
under an IDE to support the filing of a premarket approval application with
respect to that version of the Evert-O-Cath(TM) (see previous discussion under
"General"). In the second quarter of 1993, the Company

                                       12
<PAGE>   14

completed mechanical testing and in the first quarter 1994 completed animal
testing of the therapeutic version of the Evert-O-Cath(TM).

     The heart pumps under development by the Company would require extensive
evaluation prior to use on humans. These proposed products would ultimately
require tests on humans under an IDE, and premarket approval. Although design
and preclinical engineering has been completed, the Company will not commit
further significant resources to these products until such time as the Company
secures a strategic partner in the global healthcare industry to collaborate in
the development efforts as well as to provide the substantial funds required.

     Cathlab has ten specialty products which have all received marketing
clearance via the 510(k) Notification process and one pending FDA approval. The
Company is currently marketing the embolectomy catheter, bilumen irrigation
catheter, occlusion catheter, biliary gall stone removal catheter,
thermodilution catheter and the angiographic/angioscopic catheter. The newly
approved Ahn Thrombectomy catheter is in various stages of testing and
production and is expected to be launched in the second quarter 1998 if all
manufacturing phases are completed and satisfactory to our product quality
standards. The facility housing Cathlab has been inspected by both the federal
and state FDA and has been licensed for operation as a medical device
manufacturer. The Company passed its latest FDA inspection in May 1996 and
received no 483 violations during the inspection. In addition, the Company
received ISO 9001 certification in January 1998.

     Any products distributed or to be distributed by the Company are subject to
pervasive and continuing regulation by the FDA. Products must be manufactured in
registered establishments and be manufactured in accordance with "Good
Manufacturing Practices," as such term is defined under the FDC Act. Labeling
and promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. The export of devices is also
subject to regulation in certain instances.

     The Medical Device Reporting ("MDR") regulation obligates the Company to
provide information to the FDA on product malfunctions or injuries alleged to
have been associated with the use of the product or in connection with certain
product failures which could cause serious injury. If, as a result of FDA
inspections, MDR reports or other information, the FDA believes that the Company
is not in compliance with the law, the FDA can institute proceedings to detain
or seize products, enjoin future violations, or assess civil and/or criminal
penalties against the Company, its officers or employees. Any action by the FDA
could result in disruption of the Company's operations for an undetermined time.

     In addition to the foregoing, numerous other federal and state agencies,
such as environmental, fire hazard control, working condition and other similar
regulators, have jurisdiction to take actions that could have a materially
adverse effect upon the Company's ability to do business.

THIRD PARTY REIMBURSEMENT

     Hospitals, physicians and other healthcare providers that purchase medical
devices, such as the Cathlab products, OmniCath(R), OmniStent(TM) or the
Evert-O-Cath(TM), for use in furnishing care to their patients, typically rely
on third-party payers, principally Medicare, Medicaid, and private health
insurance plans, to reimburse all or part of the costs or fees associated with
the medical procedures performed with those devices, and/or of the costs of
acquiring those devices. Cost control measures adopted by third-party payers in
recent years, including the Medicare prospective payment system for inpatient
hospital patients, and reductions in Medicare payments for hospital outpatient
services and capital costs, have had and may continue to have a significant
effect on the purchasing practices of many providers, generally causing them to
be more selective in the purchase of medical devices. Limitations may be imposed
upon the conditions for which procedures may be performed or on the cost of
procedures for which third-party reimbursement is available, which may adversely
affect the market for the Company's products. In addition, if competing devices
or procedures are available, choices may be made on the basis of price. While
the Company cannot predict the cost of its devices, or the procedures to be
performed with its products, or the relative cost and efficacy of competing
products or procedures, changes in third-party payer reimbursement practices
regarding the procedures performed with

                                       13
<PAGE>   15

medical devices sold by the Company may adversely affect the Company's financial
position, results of operations, and cash flows.

     While third-party payers generally make their own decision regarding which
items and services to cover, Medicaid and other third-party payers often apply
standards similar to Medicare's in determining whether to provide coverage for a
particular medical procedure. The Medicare statute prohibits payment for any
items or services that are not reasonable and necessary for the diagnosis or
treatment of illness or injury or to improve the functioning of a malformed body
member, and the Health Care Financing Administration ("HCFA"), an agency within
the Department of Health and Human Services responsible for administering the
Medicare program, has interpreted this provision to prohibit Medicare coverage
of procedures that, among other things, are not deemed safe and effective
treatments for the conditions for which they are being used, or which are still
investigational. For medical devices, FDA clearance for marketing is required,
but is not determinative of whether these prerequisites for Medicare coverage
have been met.

     While a limited number of national coverage decisions are made by HCFA, in
general, the determination of whether a procedure satisfies these standards is
made by the Medicare carrier or intermediary which processes claims for
reimbursement within that carrier's or intermediary's jurisdiction. The Company
has not requested a national coverage decision with respect to procedures to be
performed using the OmniCath(R), the OmniStent(TM) or the Evert-O-Cath(TM)
because the Company believes that procedures utilizing other catheter products
are currently covered by Medicare, the Company does not intend to request a
decision. The unavailability of third-party coverage or inadequacy of
third-party reimbursement for procedures using the OmniCath(R), the
OmniStent(TM), or the Evert-O-Cath(TM) could adversely affect the Company's
ability to market those products.

     The Company is unable to predict what additional legislation or
regulations, if any, may be enacted or adopted in the future relating to the
Company's business or the healthcare industry, including third-party coverage
and reimbursement, or what effect any such legislation or regulation may have on
the Company.

MANUFACTURING

     The manufacturing facility received ISO 9001 certification on January 12,
1998. ISO (International Standards Organization) is an international federation
of national normalization organizations representing approximately 100
countries. ISO 9001 is a quality-assurance model that conforms to
internationally accepted guidelines on management and system elements, and is
used by companies that design, produce, inspect, test, install and service
items. Certification by the Registrar significantly validates a company's
commitment to product quality and customer service. To expand international
activities, the Company contracted with a large European Notified Body to obtain
the CE Mark for certification of product quality for its entire product line.
The European Commission currently requires CE Marking for many products sold in
the European marketplace.

     The Company's primary manufacturing and research and development center
operates within the Cathlab Division. Cathlab is located in a modern, 13,000
square foot facility in Irvine, California and benefits from the close proximity
of medical research facilities associated with various universities, as well as
UCLA Medical Center and our Scientific Advisory Board. Cathlab has ten FDA
approved balloon catheters and three catheters pending FDA approval that are
used primarily in vascular surgery for the removal of embolus (blood clots). Six
of the catheters are currently being marketed within the domestic and
international marketplace. The Company's newest product, the Ahn Thrombectomy
Catheter, a dual balloon catheter, is scheduled for product launch in the second
quarter 1998.

     The all-silicone catheters are designed to be resistant to environmental
factors, unaffected by body temperature and more biocompatible than latex
balloons or polyvinyl chloride (PVC) tubing. Allergy to latex has been
increasingly recognized as a cause of life threatening intraoperative
anaphylaxis, a systemic reaction. Frequent use of latex in patients or by health
care workers can result in sensitivity which may place some individuals at risk
for such a life threatening allergic reaction. The all-silicone design of
Cathlab's catheters negates the potential risk of intraoperative anaphylaxis.

                                       14
<PAGE>   16

     Cathlab's catheters utilize a patented one piece balloon design, thereby
eliminating glue and ties which in turn provide superior smoothness and prevent
the possibility of balloon dislodgement.

     Cathlab is currently producing 30,000 embolectomy, thrombectomy (dual
balloon), bi-lumen irrigation, occlusion, angioscopy, biliary and cardiac output
catheters of advanced silicone technology. Cathlab has the capacity to
manufacture approximately 120,000 balloon catheters annually. In addition, the
OmniCath(R) is presently being manufactured in the facility for clinical trials
on a limited production basis but the plant has the capacity to manufacture
12,000 annually.

     Management believes that the Company is now positioned to capitalize on its
silicone manufacturing expertise and patented minimally invasive technologies.
Since receiving ISO 9001 certification in January 1998, the Company has received
unsolicited requests to manufacture unique devices to the specifications of
third parties, indicating growth potential in the OEM market. One OEM contract
for 100,000 units per year is currently in force and another incorporating the
manufacture of nine separate product lines is being negotiated. Although there
can be no assurances, management anticipates that the OEM contracts, coupled
with a concentrated focus of its efforts on the marketing and distribution of
its FDA approved products and successful completion of its ongoing clinical
trials, will result in revenue growth in the next twelve months.

RESEARCH AND DEVELOPMENT

     The Company's research and development efforts as well as its ongoing
technical support activities were consolidated in the Irvine, California
facility in September 1996. The consolidation resulted in a better utilization
of resources, annual cost savings, improved communication and reduced product
development lead times. As a result of this decision the 4,800 square foot
facility in The Woodlands, Texas was closed and all R&D prototypes,
Computer-Aided Design (CAD), testing apparatus, ink drawing plotters and
computer simulation work stations have been consolidated in Irvine, California,
greatly improving the utilization of this equipment.

     The Company's research and development efforts in interventional cardiology
are aimed at increasing the convenience, ease and speed for use of percutaneous
transluminal coronary angioplasty ("PTCA") and percutaneous transluminal
angioplasty ("PTA") devices (including balloon and atherectomy catheters) while
expanding the clinical applications for which PTCA and PTA are appropriate. The
development of superior PTCA and PTA catheters requires the resolution of
several conflicting performance parameters, including catheter profile
(diameter), trackability (the ability to follow the paths of tortuous arteries)
and pushability (the ability to push through tight strictures). Meeting these
conflicting objectives requires expertise in a number of technical disciplines
that the Company must develop and retain internally. Research and development
expenses in the fiscal years ended December 31, 1997, 1996, and 1995 were
$648,049, $640,792, and $537,962, nearly all of which was applied to the
development of the OmniCath(R), OmniStent(TM) and Evert-O-Cath(TM). Research and
development expenses decreased 1.1% in 1997 over 1996 and increased 19.1% over
1995. Research and development efforts for the foreseeable future will be
focused on the Company's core technologies which include balloon catheters,
OmniCath(R), OmniStent(TM), blood filter and Evert-O-Cath(TM) drug delivery
system. The Company anticipates that research and development expenses will
increase as products approach commercial viability and may be funded by
increased revenue generated through Cathlab Division sales, from the sale of
ancillary technology or through joint development agreements with strategic
partners. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations."

     The Company has entered into agreements with various persons and entities
to conduct contract research and development and for the provision of consulting
services. These consultants are paid consulting fees plus out-of-pocket expenses
associated with their consulting efforts.

PATENTS AND PROPRIETARY INFORMATION

     The medical device industry traditionally has placed considerable
importance on obtaining and maintaining patents and trade secret protection for
significant new technologies, products and processes. The Company pursues a
policy of generally obtaining patent protection in both the U.S. and abroad for
patentable subject matter in its proprietary devices. The Company has been
issued five U.S. patents and one Notice of Allowance
                                       15
<PAGE>   17

("NOA") relating to atherectomy catheters and two relating to cardiac-assist
pumps, and the Company has a 50% interest in two other U.S. patents relating to
cardiac-assist pumps. The Company has received two patents on the OmniStent(TM)
and one on the spinal dissector. In addition, the Company has received an NOA
from the US Patent and Trademark Office on its stent delivery system. The
Company has applications pending for additional U.S. patents and foreign patents
relating to the OmniCath(R) and OmniStent(TM), and has foreign applications
pending with respect to the cardiac-assist pumps.

     The U.S. patents currently have terms expiring at various dates from 2001
to 2015, with the earliest of the current patents relating to the OmniCath(R)
expiring in 2008. The foreign patents expire on various dates commencing in
2009. As the Company develops modifications or improvements of existing methods
or products or develops new products or processes, it will seek additional
patents. The Company believes, although there can be no assurances, that the
patented aspects of its products enhance the functionality of its products and
suitability for their intended purposes which, in turn, may increase their
likelihood of commercial acceptance. The patents may limit, to some extent, the
ability of others to develop competing products.

     In connection with the Company's acquisition of Cathlab Corporation, the
Company is now the owner of rights relating to two United States patents
concerning the method of attaching the balloon to the catheter, as well as
owning patent rights relating to the same process in the United Kingdom, Germany
and Spain. Various foreign patent applications relating to the same process are
pending.

     Lawrence M. Hoffman, currently a director, stockholder and paid consultant
of the Company and formerly a Vice President, is a limited partner of Aberlyn
Capital Management Limited Partnership ("Aberlyn") and is an officer, director
and stockholder of Aberlyn Capital Management, Inc., the general partner of
Aberlyn. Effective December 31, 1992, the Company and Aberlyn entered into a
Patent Assignment and License Agreement (the "Patent and License Agreement")
pursuant to which the Company assigned patents owned by the subsidiary, Cathlab
Corporation (the "Cathlab Patents"), to Aberlyn in return for $500,000. The
Cathlab Patents were exclusively licensed back to the Company for three years
for a monthly license fee of $16,355, after which Aberlyn was required to
reassign the Cathlab Patents to the Company in exchange for $50,000. Under its
terms, if the Company declined to purchase the Cathlab Patents, the Patent and
License Agreement would automatically be extended for an additional nine months
for a monthly license fee of $17,099, after which the Cathlab Patents would
automatically revert back to the Company.

     The Company and Aberlyn entered into an equipment lease effective May 13,
1993 (the "Equipment Lease") pursuant to which the Company assigned certain
equipment to Aberlyn in consideration of $205,000. The equipment was exclusively
leased back to the Company for three years for a monthly fee of $6,706, after
which Aberlyn was required to return the equipment to the Company in exchange
for $20,500. Under the terms, if the Company opted not to purchase the
equipment, the Equipment Lease would automatically be extended for an additional
three months for a monthly payment of $7,011, after which the equipment would
automatically revert back to the Company.

     Effective August 13, 1993, the Company and Aberlyn entered into an
additional equipment lease (the "Second Equipment Lease") pursuant to which the
Company assigned certain equipment to Aberlyn in consideration of $100,000. The
equipment was exclusively leased back to the Company for three years for a
monthly fee of $3,271, after which Aberlyn was required to return the equipment
to the Company in exchange for $10,000. If the Company declined to purchase the
equipment, the term of the Second Equipment Lease was to be automatically
extended or an additional three months for a monthly payment of $3,420, after
which the equipment would automatically revert back to the Company.

     The Company and Aberlyn entered into an agreement effective March 28, 1994
whereby the terms of the Patent and License Agreement, the Equipment Lease and
the Second Equipment Lease (the "Leases") were modified. The payment terms of
the license fee pursuant to the Patent and License Agreement were revised to
semiannual payments of $97,445 and the payment terms of the Equipment Lease were
similarly revised to semiannual payments of $39,100 and $20,281, respectively.
In consideration to Aberlyn for making these modifications, the Company issued
warrants to Aberlyn to purchase 150,000 shares of the Company's common stock at
an exercise price of $1.50 per share exercisable over a five-year period. On May
28, 1996,
                                       16
<PAGE>   18

Aberlyn and the Company reached an agreement to restructure the Leases which
resulted in a revised schedule of lease payments over a twenty-four month
period, with the initial payment commencing on June 1, 1996. The payments were
based on an outstanding principal amount of approximately $500,000 and total
accrued interest of approximately $148,000. In addition, 115,000 shares of
common stock were issued in payment of consulting fees, investment banking
service fees and miscellaneous expenses totaling $115,728.

     Effective November 1, 1997, the Company and Aberlyn entered into
modification agreements of the Leases which revised the schedule of lease
payments and extended the maturity date to October 1, 1998.

     The Company believes that its future success does not depend solely upon
patents, but rather depends, to a significant extent, upon the technical
competence and creative skills of its personnel, the execution of its strategic
plan and on its significant unpatented proprietary technology. The Company has
no knowledge that it is infringing any existing patent such that it would be
liable for material damages or prevented from manufacturing or marketing its
planned products. However, competitors continue to obtain new patents and to
file applications to modify or expand claims of existing patents that could lead
to possible conflict with the Company's products or proposed products.

     The Company may decide for business reasons to retain a patentable
invention as a trade secret. In that event, or if patent protection is
unobtainable, the Company must rely upon trade secrets, know-how and continuing
technological innovation to maintain its competitive position. Employees and
consultants of the Company who have access to proprietary information have
signed confidentiality agreements with the Company.

     The Company has four trademarks: the OmniCath(R), the OmniStent(TM), the
Evert-O-Cath(TM), and Cathlab Corporation(R). The Company has applied to
register the OmniStent(TM); however, there can be no assurance that federal
registration will be obtained. "Cathlab Corporation(R)" and "OmniCath(R)" are
registered trademarks.

COMPETITION

     Competition in the biomedical industry is intense. Cathlab's catheters
compete directly with similar products sold by a number of companies. There can
be no assurance that these products will be able to obtain or maintain a sizable
market share, if any. There are many companies and academic institutions that
are capable of developing products of similar design, and that have developed
and are capable of developing products based on other technologies, that are or
may be competitive with the Company's current and proposed products. Many of
those companies and academic institutions are well-established, have
substantially greater financial and other resources than the Company, and have
established reputations for success in the development, sale and service of
products. These companies and academic institutions may succeed in developing
competing products that are more effective than those of the Company or that
receive FDA approval more quickly than the Company's products. The Company's
ability to compete will be dependent upon its ability to get products approved
by regulatory authorities and introduced to the market, including the
arrangement of a distribution network, and to provide products with advanced
performance features, none of which can be assured.

     In addition to competition from other atherectomy devices, other
angioplasty modalities, such as lasers, thermal systems (e.g. hot-tip,
hot-balloon, and spark ablation), disruptive devices (e.g., ultrasonic
angioplasty), and stents may provide competition to the OmniCath(R) and the
OmniStent(TM). The current atherectomy devices anticipated to be competitive to
the OmniCath(R) are the Simpson Atherocath (Devices for Vascular Intervention,
Inc., a division of Eli Lilly, Inc.), the Transluminal Extraction Catheter, or
"TEC" device (InterVentional Technologies, Inc.), the Auth Rotablator (Heart
Technology, Inc.), and the Kensey Catheter (Theratek International, Inc., a
division of Dow Corning Wright, a subsidiary of Dow Corning Corp.). If the
product receives regulatory approval on a timely basis, the Company believes the
OmniCath(R)'s competitive position will be enhanced by its closed aspiration
system (which eliminates down-stream debris), low cost disposability,
microangioscope capability, and conventional guidewire capability, as well as by
the positioning of its side-window which allows the rotating blade to shave
plaque from inside the catheter as opposed to from the tip of the catheter.
Competition to the Company's OmniStent(TM) is expected to come from Johnson &
Johnson, which had its Palmaz-Schatz Stent approved by the FDA in 1994, the Cook
Gianturco,
                                       17
<PAGE>   19

from Medtronic's Wiktor Stent and from Schneider's Wallstent, neither of which
has obtained full FDA approval.

     While lasers, ultrasonic angioplasty devices and other new modalities have
proliferated over the past several years, none of these technologies has yet
been shown to reduce the restenosis rate or to reduce the overall procedural
cost of angioplasty. Lasers are particularly expensive (most laser angioplasty
systems sell for $100,000 -- $300,000), and the Company believes lasers will be
accepted only if significantly better results can be shown clinically. Lasers
have been found to be damaging to the arterial wall, and non-laser versions
including thermal balloon devices, spark ablation systems, and other new
modalities are currently under development and have not reached
commercialization. The Company believes that direct removal of tissue without
thermal effect may be the most desirable approach for angioplasty, as most
thermal systems cause trauma to the arterial wall, resulting in proliferation of
fibrous tissue and early restenosis.

     The Company does not know of any person or entity currently marketing a
toposcopic catheter with features similar to the Evert-O-Cath(TM).

EMPLOYEES

     As of March 1, 1998, the Company had 25 full-time employees, 1 in research
and development, 2 in sales and marketing, 14 in manufacturing, 3 in quality
control and 5 in corporate management and administration. None of the Company's
employees are represented by labor unions. The Company considers its
relationship with its employees to be in good standing. The Company also employs
two paid consultants (Dr. Samuel S. Ahn and Lawrence M. Hoffman) who are paid on
a monthly basis at rates ranging from $3,125 to $12,500 per month.

EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth information pertaining to executive officers
of the Company:

<TABLE>
<CAPTION>
                   NAME                     AGE                     POSITION
                   ----                     ---                     --------
<S>                                         <C>   <C>
Steven B. Rash............................  50    President, Chief Executive Officer and
                                                  Chairman of the Board
Marshall Kerr.............................  47    Vice President, Sales and Marketing
Colene Blankinship........................  48    Controller, Chief Accounting Officer,
                                                  Secretary and Treasurer
</TABLE>

     STEVEN B. RASH has served as President, Chief Executive Officer and
director of the Company since July 15, 1995 and as Chairman of the Board since
February 4, 1997. From 1994 until June 1995, Mr. Rash served as Vice President
of Operations of Blue Rhino Corporation, an industrial products manufacturer.
From 1992 to 1994, Mr. Rash served as President of the Technical Services
Division of the Maxum Health Corporation, a company engaged in providing mobile
MRI services. From 1989 to 1992, Mr. Rash served as the President of Intex
Medical Technologies, Inc., a medical equipment manufacturer. Prior thereto, Mr.
Rash held various positions with BOC Group, plc., an international manufacturer
of industrial gases and healthcare products and services. Mr. Rash holds an MBA
from Southern Illinois University and served for four years in the U.S. Army,
where he reached the rank of Captain.

     MARSHALL KERR joined the Company October 10, 1997 as a sales consultant and
was appointed Vice President, Sales and Marketing December 15, 1997. From 1996
to 1997 Mr. Kerr served as Vice President, Sales and Marketing at US Medical
Instruments, Inc., a manufacturer of disposable medical products where he
established and directed both the domestic and international sales forces. He
served as Vice President Sales with ICU Medical, Inc. from 1993 to 1996 where he
directed their national sales efforts and reconstructed its distribution
network. Prior to ICU Medical Inc. Mr. Kerr was Executive Vice President of
Professional Hospital Supply from 1985 to 1993.

     COLENE BLANKINSHIP, CPA joined the Company February 7, 1995 as Controller
and became the Chief Accounting Officer November 1995. She was elected
Secretary/Treasurer February 4, 1997. From 1992

                                       18
<PAGE>   20

through 1994 Mrs. Blankinship served as Controller of Excel Resources, Inc., a
gas marketing company in Houston, Texas. She has 13 years experience in public
accounting which includes 9 years with the local firm of Tribolet, Fuller &
Associates, P.C., Humble, Texas. Mrs. Blankinship attended Texas Tech University
and North Harris County College and is a CPA. Mrs. Blankinship is a national
director of the American Society of Women Accountants, a position she has held
since July 1996.

ITEM 2. PROPERTIES

     As of March 1, 1998, the Company leases approximately 2,400 square feet of
space at 10077 Grogan's Mill Road, Suite 100, The Woodlands, Texas, which houses
its corporate headquarters. The three-year lease commenced June 1, 1997. The
Company believes that this facility is adequate for its operations during the
remaining term of the lease.

     In connection with the Company's acquisition of Cathlab Corporation, it now
leases approximately 13,000 square feet of space at 17991 Fitch, Irvine,
California, which houses the manufacturing, research and development, and sales
facilities. The lease commenced on September 1, 1990 and was renewed in August
1997 for an additional year. The Company subleased 3,000 square feet to an
unrelated party in January 1996 for $3,000 per month which terminated April 30,
1997 upon early notification by the lessee. The Company believes that this
facility is adequate for its operations during the remaining term of the lease.

ITEM 3. LEGAL PROCEEDINGS

     On December 8, 1994, a vendor commenced a lawsuit against the Company
regarding unpaid invoices in the amount of $124,759 plus attorney fees and
accrued interest. On June 15, 1995, the parties to the lawsuit executed a
Stipulation of Settlement Agreement, a Consent Judgment and a Stipulation of
Dismissal to be held in escrow. The Company agreed to pay $125,000 to the vendor
under the settlement agreement; $25,000 was paid upon execution of this
stipulation and the balance was due on or before October 31, 1995. The amount of
$100,000 was included in accounts payable at December 31, 1995. The balance was
paid through the issuance of 116,145 shares of the Company's common stock in
1996. The vendor sold the shares for less than the amount owing under the
settlement agreement including applicable interest and legal fees. The balance
of approximately $55,000 has been properly accrued in 1997.

     In May 1997, a former officer and director of the Company filed a lawsuit
alleging oppressive action toward a minority shareholder, breach of contract,
wrongful termination and unpaid debts and advances. The Company is vigorously
contesting this lawsuit. The February 1998 mediation conference, which was
mandated by the Court, did not result in a settlement agreement and the case is
scheduled for trial in 1998. The Company is unable to make a meaningful analysis
of possible or likely damages, if any.

     In August 1997, a former officer and director of the Company filed a
lawsuit alleging breach of contract and is seeking specific performance and
monetary damages. The Company is vigorously contesting this lawsuit. The Company
has accrued $125,000 which is management's best estimate of the ultimate
liability, if any. The resolution of this matter may have a material adverse
impact on the Company's financial position, results of operations or cash flows.

     In September 1997, a former distributor filed a lawsuit alleging the letter
agreement terminating their distribution agreement was breached by the Company
due to the non-issuance of options to purchase 437,500 shares of common stock at
$0.40 per share. These options have been properly reserved, but have not been
issued. Management believes the resolution of this matter will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.

     The Company is occasionally a party to litigation (other than that
specifically noted) arising in the ordinary course of business. Management
regularly analyzes current information and, as necessary, provides an accrual
for probable liabilities for the eventual disposition of the matter. In the
opinion of management, the ultimate outcome of these matters will not materially
impact the Company's financial position, results of operations or cash flows.

                                       19
<PAGE>   21

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The Company held its annual meeting of stockholders (the "Annual Meeting")
on December 19, 1997. The stockholders of record on November 3, 1997 were
entitled to vote at the meeting. The following directors were elected to serve
until the next Annual Meeting or until their successors are duly elected and
qualified:

<TABLE>
<CAPTION>
                                                                 FOR        WITHHELD
                                                              ----------    --------
<S>                                                           <C>           <C>
Steven B. Rash..............................................  12,460,809    568,342
Lawrence M. Hoffman.........................................  12,501,606    527,525
Claudio M. Guazzoni.........................................  12,503,926    525,225
Richard S. Serbin...........................................  12,514,626    514,525
</TABLE>

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     The Company's Common Stock traded on the Nasdaq Small-Cap Market under the
symbol ABMI from October 22, 1991 through October 13, 1994. On October 13, 1994,
the Company was delisted from NASDAQ because the Company's equity fell below the
required $1,000,000 on June 30, 1994. The following table sets forth, for the
periods indicated, the range of high and low bid prices for the Common Stock as
reported by OTC Bulletin Board(R). The quotes represent "Inter-dealer" prices
without adjustment or markups, markdowns or commissions and do not necessarily
represent actual transactions.

<TABLE>
<CAPTION>
                                                                    COMMON
                                                                    STOCK
                                                              ------------------
                                                               HIGH        LOW
                                                              -------    -------
<S>                                                           <C>        <C>
YEAR ENDING DECEMBER 31, 1996
  First Quarter.............................................   .78125     .375
  Second Quarter............................................  2.8125      .625
  Third Quarter.............................................  2.25       1
  Fourth Quarter............................................  2           .875
YEAR ENDING DECEMBER 31, 1997
  First Quarter.............................................  1.625      1
  Second Quarter............................................  1.09375     .6875
  Third Quarter.............................................   .71875     .40625
  Fourth Quarter............................................   .59        .21
</TABLE>

     As of November 3, 1997 there were approximately 328 holders of record and
approximately 3,000 additional beneficial shareholders of the Company's common
stock. The closing Inter-dealer prices for the Company's common stock on March
30, 1998 was $0.61.

     To date the Company has not paid any dividends on its common stock. The
payment of future dividends, if any, is within the discretion of the Board of
Directors and will depend on the Company's earnings, its capital requirements
and financial condition, as well as, other relevant factors. The Company does
not intend to declare any dividends in the foreseeable future, but instead
intends to retain all earnings, if any, for use in the Company's business
operations.

                                       20
<PAGE>   22

ITEM 6. SELECTED FINANCIAL DATA

     The selected financial data presented below has been derived from the
consolidated financial statements of the Company (A Development Stage
Enterprise). The Company declared no common stock dividends during any period
presented. The operating results of Freedom Machine, Inc. and Cathlab
Corporation since the respective dates of acquisition are included in the
selected operating statement data below. This data should be read in conjunction
with the consolidated financial statements included elsewhere herein.

SELECTED OPERATING STATEMENT DATA:

<TABLE>
<CAPTION>
                                FISCAL          FISCAL          FISCAL          FISCAL          FISCAL        INCEPTION,
                                 YEAR            YEAR            YEAR            YEAR            YEAR        SEPT. 4, 1984
                                 ENDED           ENDED           ENDED           ENDED           ENDED          THROUGH
                             DEC. 31, 1997   DEC. 31, 1996   DEC. 31, 1995   DEC. 31, 1994   DEC. 31, 1993   DEC. 31, 1997
                             -------------   -------------   -------------   -------------   -------------   -------------
<S>                          <C>             <C>             <C>             <C>             <C>             <C>
Sales, Net.................   $   545,473     $   579,533     $   660,770     $   637,375     $   826,590    $  3,860,120
Cost of Sales..............      (482,360)       (420,838)       (649,355)       (782,729)       (960,232)     (3,715,266)
Interest Income............        44,200           4,252           7,239             902          23,663         153,934
Other Income (Expense).....        25,766        (114,762)      1,561,203(2)      (56,209)(1)        1,353      1,942,550
Interest Expense...........      (183,538)       (313,914)       (276,688)       (182,606)     (1,261,203)     (2,878,976)
Research & Devel.
  Expense..................      (648,049)       (640,792)       (537,962)     (1,167,773)     (2,397,405)     (7,898,042)
Selling, General & Admin.
  Expense..................    (2,075,695)     (1,718,595)     (2,169,591)     (2,235,116)     (4,381,165)    (17,532,630)
Distributor Settlement.....            --              --              --              --              --      (1,080,915)
                              -----------     -----------     -----------     -----------     -----------    ------------
Net Loss...................    (2,774,203)     (2,625,116)     (1,404,384)     (3,786,156)     (8,148,399)    (27,149,225)
Less Preferred Stock
  Dividends................            --      (1,183,413)             --              --              --      (1,183,413)
                              -----------     -----------     -----------     -----------     -----------    ------------
Net Loss Available to
  Common Shareholders......   $(2,774,203)    $(3,808,529)    $(1,404,384)    $(3,786,156)    $(8,148,399)   $(28,332,638)
                              ===========     ===========     ===========     ===========     ===========    ============
Net Loss per Common Share..   $      (.18)    $      (.34)    $     (0.15)    $     (0.46)    $     (1.62)
                              ===========     ===========     ===========     ===========     ===========
Average Number of Common
  Shares Outstanding.......    15,528,231      11,310,592       9,362,198       8,188,980       5,041,698
                              ===========     ===========     ===========     ===========     ===========
</TABLE>

---------------

(1)  Other expense in December 31, 1994 includes the write-off of the Superstat
     assets. See "Notes to Financial Statements."

(2)  Other income in December 31, 1995 includes $1,000,000 forfeited escrow
     deposit received from USSC and sale of OmniCath(R) EPO patent to Guerbet.
     See "Item 7 -- Management Discussion and Analysis of Financial Condition
     and Results of Operations ."

SELECTED BALANCE SHEET DATA:

<TABLE>
<CAPTION>
                                                                           DECEMBER 31
                                           ----------------------------------------------------------------------------
                                               1997            1996            1995            1994            1993
                                           ------------    ------------    ------------    ------------    ------------
<S>                                        <C>             <C>             <C>             <C>             <C>
Working Capital (Deficit)................  $   (627,151)   $   (256,206)   $ (3,827,287)   $ (3,246,020)   $ (1,057,831)
Total Assets.............................     1,945,056       3,069,151       1,883,278       2,445,076       4,000,345
Long-Term Debt, Net of Current
  Maturities.............................        71,855         110,472              --             611           2,784
Capital Lease Obligations, Net of Current
  Maturities.............................            --         302,766           7,095          18,033         485,580
Total Liabilities........................     1,847,905       2,940,556       4,685,133       4,002,192       2,761,942
Preferred Stock..........................             2               3              --              --              --
Deficit Accumulated During the
  Development Stage......................   (27,149,225)    (24,375,022)    (21,749,906)    (20,345,522)    (16,559,366)
Total Stockholders' Equity (Deficit).....        97,151         128,595      (2,801,855)     (1,557,116)     (1,238,403)
</TABLE>

                                       21
<PAGE>   23

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

RESULTS OF OPERATIONS

     The Company is in the development stage and has had limited operating
revenues since its inception on September 4, 1984. From September 4, 1984
through December 31, 1997, the Company had an accumulated deficit of
$27,149,225.

  Year Ended December 31, 1997 Compared With Year Ended December 31, 1996

     During 1997 the Company focused on productivity improvements, ISO 9001
certification, CE Mark certification process, product development and clinical
investigational programs. The addition of domestic distributors became the focus
during the fourth quarter of 1997 and continues to receive priority in 1998.

     Net sales decreased 5.9% for 1997 compared to 1996. The decline is due to
the ineffectiveness of the Company's sales team during the first nine months of
1997. Corrective action was taken and new sales staff was added in October
resulting in fourth quarter 1997 net sales of $184,852 compared to $162,336
fourth quarter 1996 net sales. Foreign export net sales increased to 65.5% in
1997 compared to 54.5% in 1996. Four new domestic distributors were added during
the fourth quarter 1997. The first will concentrate its sales efforts in
California, Nevada and Arizona; the second will focus its efforts in
Pennsylvania, Ohio and Indiana markets; the third serves the Northwestern U.S.
market, primarily Oregon, Washington, Montana and Idaho; and the fourth will
concentrate its efforts in the Southwest and Rocky Mountain regions.

     Cost of sales percentage is 88.4% of 1997 net sales as compared to 72.6% of
1996 net sales. The increase in cost of sales percentage is due primarily to a
year-end adjustment to inventory standard cost as well as to the increased sales
of one of the Company's least profitable items.

     During 1997 total selling, general and administrative expenses increased to
$2,075,695 from $1,718,595. The overall increase is due to several factors.
First, the sublease of 3,000 square feet of the Cathlab facility for $3,000 per
month which began in January 1996 terminated April 30, 1997 upon proper
notification by the lessee. Sales and marketing expenses increased approximately
$19,000 primarily due to salaries and payroll-related expenses. Other salaries
and payroll-related expenses increased approximately $239,000 due to the hiring
of two additional corporate personnel and a quality assurance manager, as well
as salary and benefit increases. Two other areas increased significantly. Legal
and accounting expenses increased approximately $35,000 or 25.3% and insurance
increased approximately $34,000 or 49.8%. Product liability insurance was added
during the third quarter 1997 as the Company became more proactive in risk
management. The Company began the ISO 9001 certification process in the fourth
quarter of 1996 and the CE Mark certification process in the second quarter
1997. Expenses related to the two certification processes during 1997 were
approximately $54,000.

     Research and development expenses for 1997 increased 1.1% compared to the
same period in 1996.

     Interest expense decreased 41.5% to $183,538 in 1997 compared to $313,914
in 1996 due to the decrease of over $1 million in notes payable and capital
lease obligations.

     For the period from inception to December 31, 1997, the Company's other
income of $1,942,550 consisted primarily of $1 million received in connection
with a forfeited option fee from United States Surgical Corporations ("USSC"),
approximately $495,000 realized gain from the sale of the European patent for
the OmniCath(R) atherectomy catheter to Guerbet S.A. of France ("Guerbet") for a
purchase price of $500,000 cash, $400,000 received from Guerbet in 1991 in
connection with the development of certain of the Company's products, and
$200,000 amortization of the license fee received from Wright Medical
Technologies, Inc.

  Year Ended December 31, 1996 Compared With Year Ended December 31, 1995

     During the year the Company made substantial investments in five key areas.
First, the Company consolidated all manufacturing operations into our Irvine,
California facility, enabling it to increase manufac-

                                       22
<PAGE>   24

turing capabilities and efficiencies. Secondly, investments were made in the
manufacturing infrastructure resulting in productivity improvements. Third, the
Company invested in product development and clinical investigational programs to
further the advancement of its core product technologies. Fourth, the Company
invested in the expansion of its sales and marketing efforts by implementing new
marketing programs. Finally, considerable time and effort was invested in
reshaping the Company's balance sheet via a debt to equity conversion and the
raising of additional equity capital via private placements.

     Net sales decreased $81,237 or 12.3% for 1996 compared to 1995. The decline
is due to delays encountered in product registrations in international markets
by the Company's newly appointed international distributors, discontinued
product lines and limited international OmniCath(R) sales due to U.S.
OmniCath(R) clinical trial needs. Foreign export net sales decreased to 54.5% in
1996 compared to 81% in 1995. The Company appointed twenty-two (22) new
international distributors in 1995. After an international distributor is
appointed, the distributor must comply with the applicable country regulations
before products can be imported and sold in a particular country. Depending upon
the country, the registration period can take from as little as a few weeks to
over nine months, causing delays in product sales while the distributor awaits
approval to sell the product. The Company believes that its revised distribution
network will result in increased product sales, primarily in Western Europe,
South America, Japan and the Pacific Rim countries. The Company discontinued its
hole punch operations during the fourth quarter of 1995. The hole punch
operations provided approximately $30,000 or 4.5% of net sales during 1995 with
related cost of goods sold of approximately $26,000.

     Gross profit margins increased to 27.4% in 1996 compared to 1.7% in 1995.
This increase is due primarily to better inventory management, decrease in
factory overhead and increased productivity of the plant. In order to improve
inventory management the Company instituted restocking procedures to take
advantage of bulk order discounts and computerized inventory management, as well
as shipping and receiving information. The better tracking system enabled the
Company to avoid having any expired inventory during 1996. In February 1996 the
Company hired a director of manufacturing to assess the inefficiencies in the
current system and to ready the plant for increased production. The Company
negotiated a more favorable rental rate resulting in decreased facility rent, a
portion of which is allocated to plant overhead, introduced energy saving
operating techniques, reduced scrap rates and improved batch yields. Higher
recruitment standards, improved training for production employees and revised
salary structures to reduce personnel turnover were instituted. Since the
manufacturing process is labor intensive, these changes resulted in increased
productivity as well as reducing costs.

     Total selling, general and administrative expenses decreased during 1996 to
$1,718,595 from $2,169,591. The overall decrease is due to several factors. The
Company subleased 3,000 square feet of the Cathlab facility to an unrelated
party in January 1996 and downsized the corporate headquarters and consolidated
all manufacturing activities, technical support and research and development in
the Irvine, California facility. In addition, the Company renegotiated the
Cathlab facility lease in August 1996 for an additional $16,000 in savings in
1996 and an annual savings of $48,000.

     Research and development expenses increased 19.1% to $640,792 in 1996
compared to $537,962 in 1995. The increase is primarily attributed to the
Company's efforts to initiate U.S. clinical trials for the OmniCath(R). These
expenses are expected to increase in the future as the Company's products
approach commercial viability and will be funded by increased revenue generated
through Cathlab Division sales or from the sale of ancillary technologies or
through joint development agreements with strategic partners.

     Interest expense increased 13.5% to $313,914 in 1996. This is primarily due
to the obligation due USSC. The Note, originally due January 20, 1996, was
extended to March 15, 1996 and subsequently extended to September 1996. Monthly
payments were made from March through August 1996, and the remaining balance
paid in September 1996 with proceeds received from promissory notes. These
promissory notes were repaid in full in November 1996.

     Other income (expenses) decreased $1,675,965 in 1996 as compared to 1995.
This is primarily due to the Company's receipt in 1995 of a $1 million forfeited
option fee from USSC and a realized gain of approximately $495,000 from the sale
of a European patent to Guerbet.
                                       23
<PAGE>   25

LIQUIDITY AND CAPITAL RESOURCES

     The Company had a working capital deficiency as of December 31, 1997 of
$627,151 and cash and cash equivalents of $82,789.

     The net cash used by operating activities in 1997 of $2.3 million was 38%
more than in 1996. In 1996 the cash flow was favorably impacted by the
negotiations of debt to equity conversions of approximately $1.5 million with
various stockholders, vendors and a bank. In addition, two consultants were paid
in stock rather than cash.

     Cash flows of $452,145 were provided by investing activities in 1995 as
compared to cash used by investing activities of $185,046 and $76,923 in 1997
and 1996, respectively. Cash flows were favorably impacted in 1995 by the sale
of technology and assets of the Company's hole punch operations.

     Capital expenditures were $142,206 and $46,773 in 1997 and 1996,
respectively. Additions in 1996 included new computers and leasehold
improvements to the Cathlab facility to facilitate the relocation of the
research and development activities from Texas. During 1997 the Company
purchased additional computers, accounting software upgrades, manufacturing
equipment and molds. The vendor upgrades made to each of the Company's
computer-based applications accommodates the millenium change. In addition, the
Company continues to invest in the development of its patents as evidenced by
the use of funds of $44,356, $31,414 and $51,877 for the years ended December
31, 1997, 1996 and 1995, respectively. Since inception, the Company has expended
$481,344 on internally developed patents.

     Cash flows of $1,371,414, $2,906,223 and $1,019,504 were provided by
financing activities for the years ended December 31, 1997, 1996, and 1995,
respectively. Since inception, financing activities have provided net cash of
$20,516,280. Financing activities consist of note proceeds and repayments,
capital lease obligations and repayments, proceeds from the sale of debentures,
preferred stock, common stock and warrants, proceeds from the exercise of
warrants and options, related offering and financing costs, cash dividends on
preferred stock and the acquisition of treasury stock.

     In March 1997 the Company raised $2.5 million capital pursuant to an
offering of the Company's equity securities. Offering costs of $287,590 were
paid from the proceeds of this transaction.

     In February 1996, the Company and Zanett, a financial consulting firm,
signed an agreement whereby Zanett agreed to assist the Company in raising
capital pursuant to an offering of the Company's equity securities. (See
"Related Party Transactions"). Funds of approximately $1.7 million were raised
in the first offering. An additional $1.5 million was received pursuant to an
offering of the Company's securities in November 1996. As a result of Securities
and Exchange Commission guidance issued in early 1997 with respect to beneficial
conversion features in connection with the issuance of convertible preferred
stock, the Company was deemed to recognize noncash preferred stock dividends
totaling approximately $1.2 million in fiscal year 1996. This amount is
equivalent to the discount from the fair market value of the common stock given
to the purchasers of the Series A and B calculated as of the date of the sale of
such stock.

     On May 28, 1996, Aberlyn and the Company reached an agreement to
restructure the Leases which resulted in a revised schedule of lease payments
over a twenty-four month period, with the initial payment commencing on June 1,
1996. In addition, 115,000 shares of common stock were issued in payment of
consulting fees, investment banking service fees and accumulated miscellaneous
expenses totaling $115,728. Effective November 1, 1997, the Company and Aberlyn
entered into modification agreements of the Leases which revised the schedule of
lease payments and extended the maturity date to October 1, 1998.

     In June 1996, the Company executed an installment note payable to a vendor
in the amount of $157,263, payable in monthly installments of $3,858 including
interest, beginning September 1, 1996 and maturing August 1, 2000. The note
bears interest at 8.25% per year and is uncollateralized.

                                       24
<PAGE>   26

     During 1997 the Company received cash proceeds of $3,750 from the exercise
of options and $320,033 from the exercise of warrants. Cash proceeds of $97,000
from the exercise of options, $391,325 from the exercise of warrants and $3,231
from the purchase of stock by individuals were received in 1996.

     In December 1996, the Company received proceeds of $1 million from a 30-day
note payable to bridge any potential funding shortfalls (regarding clinical
trial costs) until such time as warrants were exercised or new equity funding
was received. The note was paid in full in January 1997 and the interest was
paid by the issuance of 11,722 shares of common stock.

     From January 26 through March 16, 1998, the Company issued 920,696 shares
of common stock through private placements to accredited investors. The share
price ranges from $0.34-$0.43 for a total of $331,000. The Company believes that
its current sources of liquidity (cash on hand and funds provided by operations)
are sufficient to fund its operations for the next four to six months. The
Company is actively seeking additional financial, including the potential sale
of equity and debt securities, as well as possible sales of ancillary technology
and strategic partnering relationships.

     The Company requires significant additional funds to enable it to complete
development and, subject to obtaining required regulatory approvals,
commercialization of the OmniCath(R) for peripheral and A-V fistula use, to
enter into marketing and distribution arrangements for the OmniCath(R), to
commence and continue the development of other products which include the
OmniStent(TM), Evert-O-Cath(TM), and other products as well as product
enhancements to its existing 100%-silicone balloon catheters, the OmniCath(R),
Evert-O-Cath(TM) and OmniStent(TM) and to expand its manufacturing and
distribution abilities with respect to the Cathlab products. Research and
development expenditures for 1998, including amounts for clinical affairs, are
expected to be approximately $1.2 million. If the Company experiences delays in
the introduction, manufacturing or sale of the OmniCath(R), or if the
OmniCath(R) does not achieve market acceptance for any reason, substantial
additional financing may be required by the Company to continue its operations,
and to improve, complete the development of, obtain regulatory approvals for,
and manufacture or market products. The Company receives some revenues and
expects to continue to receive revenues from the sale of Cathlab's products. The
Company anticipates that Cathlab's revenues should increase during 1998;
however, this increase will not be sufficient to satisfy the Company's funding
needs.

     There can be no assurance that the Company will be able to obtain
additional funding on acceptable terms or in time to fund any necessary or
desirable expenditures. In the event such funding is not obtained, the Company's
research and development projects will be delayed or scaled back. Failure to
obtain additional financing will have material adverse effect on the Company's
operations. In order to continue as a going concern, the Company must raise
additional funds as noted above and ultimately must achieve profitable
operations.

     Though still a developmental stage company engaged in the development,
manufacture and marketing of medical devices, the Company has ten products
presently available to market and has a comprehensive business strategy which it
believes will enable it to capitalize on its technologies and on developing
trends in the healthcare industry. The Company's strategic plan consists of
focusing on increased market penetration of its ten existing FDA-approved
products, continuing to revamp its distribution network, continuing to focus on
the commercialization of its core technologies by pursuing US and international
regulatory approval, aggressively pursuing the sale of ancillary technology to
meet future cash requirements and to validate the proprietary nature of its
technologies and continuation of efforts to identify and pursue strategic
alliances.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     See Index to Consolidated Financial Statements and Financial Statement
Schedule on page F-1 herein.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None.

                                       25
<PAGE>   27

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth information pertaining to executive officers
of the Company:

<TABLE>
<CAPTION>
                 NAME                    AGE                  POSITION
                 ----                    ---                  --------
<S>                                      <C>   <C>
Steven B. Rash.........................  50    President and Chief Executive Officer
                                                 Chairman of the Board
Lawrence M. Hoffman....................  54    Director
Claudio Guazzoni.......................  35    Director
Richard S. Serbin......................  53    Director
Marshall Kerr..........................  47    Vice President Sales & Marketing
Colene Blankinship.....................  48    Controller, Chief Accounting Officer,
                                                 Secretary and Treasurer
</TABLE>

     STEVEN B. RASH has served as President, Chief Executive Officer and
director of the Company since July 15, 1995. Mr. Rash was appointed Chairman of
the Board on February 4, 1997. From 1994 until June 1995, Mr. Rash served as
Vice President of Operations of Blue Rhino Corporation, an industrial products
manufacturer. From 1992 to 1994, Mr. Rash served as President of the Technical
Services Division of the Maxum Health Corporation, a company engaged in
providing mobile MRI services. From 1989 to 1992, Mr. Rash served as the
President of Intex Medical Technologies, Inc., a medical equipment manufacturer.
Prior thereto, Mr. Rash held various positions with BOC Group, PLC, an
international manufacturer of industrial gases and healthcare products and
services. Mr. Rash holds an MBA from Southern Illinois University and served for
four years in the U.S. Army, where he reached the rank of Captain.

     LAWRENCE M. HOFFMAN has served as a director of the Company since April
1991 and as Vice President of Corporate Relations from July 1990 to December
1991, when he was appointed Vice President of Business Development, a position
he held until June 28, 1995. From March 28, 1995 until June 28, 1995, Mr.
Hoffman served as the interim Treasurer. Mr. Hoffman is also President and Chief
Executive Officer of Aberlyn Group, Inc., a financial consulting firm that he
founded in 1989. Prior to founding Aberlyn Group, Inc., Mr. Hoffman was employed
as Director of Corporate Finance at Monmouth Investments, a New Jersey-based
securities brokerage firm. From January 1986 to May 1988, Mr. Hoffman served as
Chairman of Nicholas, Lawrence & Co., a securities brokerage firm specializing
in institutional trading and biotechnology companies. Mr. Hoffman holds a B.S.
in Economics from New York University.

     CLAUDIO M. GUAZZONI has served as a director of the Company since March 7,
1996. Mr. Guazzoni is the President and Chief Executive Officer of Zanett
Capital, Inc. ("Zanett") and has served in that capacity since 1993. He is
engaged in the business of providing financial and strategic consulting services
to business entities. Prior to his service at Zanett, Mr. Guazzoni was a Money
Manager with Delphi Capital Management, Inc. in 1992 and an associate with
Salomon Brothers, Inc. from 1985 to 1991.

     RICHARD S. SERBIN has served as a director of the Company since July 17,
1996. Since 1991, Mr. Serbin has served as Executive Vice President and a
director of Bio-Imaging Technologies, Inc. which provides specialized consulting
services to pharmaceutical and biotechnology companies. From January 1991 to
March 1992, Mr. Serbin was Chairman of the Board of Radius Scientific, Inc., a
medical communications company which he founded. From June 1989 to January 1990,
he served as President of Bradley Pharmaceuticals, Inc. and from September 1988
to May 1989, held the position of Senior Vice President of Lifetime Corporation,
a holding company whose major asset, Kimberly Quality Care, is a provider of
home healthcare and temporary nursing services. Mr. Serbin is a registered
patent attorney, registered pharmacist, member of the Board of Trustees of the
Mountainside Hospital, and a member of the Board of Health of Roseland, New
Jersey. Mr. Serbin holds a B.S. from Rutgers College of Pharmacy, a J.D. from
Seton Hall Law School and a LL.M in Trade Regulation from New York University
School of Law.

                                       26
<PAGE>   28

     MARSHALL KERR joined the Company October 10, 1997 as a sales consultant and
was appointed Vice President, Sales and Marketing December 15, 1997. From 1996
to 1997 Mr. Kerr served as Vice President, Sales and Marketing at US Medical
Instruments, Inc., a manufacturer of disposable medical products where he
established and directed both the domestic and international sales forces. He
served as Vice President Sales with ICU Medical, Inc. from 1993 to 1996 where he
directed their national sales efforts and reconstructed its distribution
network. Prior to ICU Medical Inc. Mr. Kerr was Executive Vice President of
Professional Hospital Supply from 1985 to 1993.

     COLENE BLANKINSHIP, CPA joined the Company February 7, 1995 as Controller
and became the Chief Accounting Officer November 1995. She was elected Secretary
and Treasurer on February 4, 1997. From 1992 through 1994, Ms. Blankinship
served as Controller of Excel Resources, Inc., a gas marketing company in
Houston, Texas. She has 13 years experience in public accounting which includes
9 years with the local firm of Tribolet, Fuller & Associates, P.C., Humble,
Texas. Ms. Blankinship attended Texas Tech University and North Harris County
College and is a CPA. Ms. Blankinship is a national director of the American
Society of Women Accountants, a position she has held since July 1996.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     To the Company's best knowledge, upon its review of Forms 3, 4 and 5 and
any amendments thereto furnished to the Company pursuant to Section 16 of the
Securities Act of 1934, as amended, all required reports for fiscal year 1997
have been filed on a timely basis by reporting persons except for Messrs.
Hoffman, Guazzoni and Serbin who were late in filing their Form 5 and Mr. Kerr
who has not filed his Form 3.

ITEM 11. EXECUTIVE COMPENSATION

     The following summary compensation table sets forth the aggregate
compensation paid or accrued by the Company to the Chief Executive Officer and
to executive officers whose annual compensation exceeded $100,000 for the fiscal
year ended December 31, 1997, for services during the fiscal years ended
December 31, 1997, 1996 and 1995.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                  LONG-TERM COMPENSATION
                                                                       --------------------------------------------
                        ANNUAL COMPENSATION                                   AWARDS
-------------------------------------------------------------------    ---------------------
                                                                        PAYOUTS
                                                              (E)      ----------
                                                             OTHER        (F)         (G)                     (I)
                                                            ANNUAL     RESTRICTED   SHARES/         (H)       ALL
              (A)                         (C)        (D)    COMPEN-      STOCK      OPTIONS/        LTP      OTHER
           NAME AND              (B)    SALARY      BONUS   SATION      AWARD(S)      SARS        PAYOUTS   COMPEN-
      PRINCIPAL POSITION         YEAR     ($)        ($)    ($)(1)        ($)         (#)           ($)     SATION
      ------------------         ----   -------     -----   -------    ----------   --------      -------   -------
<S>                              <C>    <C>         <C>     <C>        <C>          <C>           <C>       <C>
Steven B. Rash.................  1997   165,000              9,600                  927,000(4)(5)
President, Chief Executive
  Officer                        1996   141,875              7,496
                                 1995    61,875(2)          19,941(3)               600,000(4)
</TABLE>

---------------

(1) Cost of life insurance and auto allowance.

(2) Annual compensation of $135,000 prorated from July 16, 1995, when Mr. Rash
    began his service with the Company.

(3) Includes relocation expenses paid in the amount of $19,745.

(4) Represents options issued in connection with a three-year employment
    agreement, vesting on various dates during the term of the agreement. See
    "Employment Agreements."

(5) Includes options to purchase 27,000 shares of common stock received as
    director.

     The following table sets forth certain information with respect to stock
options granted during the fiscal year ended December 31, 1997 to each of the
named executive officers.

                                       27
<PAGE>   29

                             STOCK OPTIONS GRANTED

<TABLE>
<CAPTION>
                                                                                  POTENTIAL REALIZABLE
                                                                                   VALUE PER SHARE AT
                                                                                    ASSUMED RATES OF
                                               % OF                                STOCK APPRECIATION
                                               TOTAL                CLOSING BID     FOR OPTION TERM
                          DATE OF   NO. OF    OPTIONS   PRICE PER   ON DATE OF    --------------------
          NAME             GRANT    SHARES    GRANTED     SHARE      GRANT(4)       5%           10%
          ----            -------   -------   -------   ---------   -----------   ------       -------
<S>                       <C>       <C>       <C>       <C>         <C>           <C>          <C>
Steven B. Rash..........  5/19/97   900,000             $.6875      .6$875         $.43         $1.10
                          *1/1/97    15,000             1.00           .9375        .20           .51
                           2/4/97     2,000             1.3125        1.3125        .36           .80
                          3/17/97     2,000             1.21875       1.21875       .34           .74
                          4/17/97     2,000             .96875         .96875       .27           .59
                          7/17/97     2,000             .46875         .46875       .13           .29
                           9/8/97     2,000             .53            .53          .15           .32
                          9/23/97     2,000             .47            .47          .13           .29
</TABLE>

---------------

* Granted 11/22/96, agreement dated 1/1/97

     The following table sets forth certain information with respect to each
exercise of stock options during the fiscal year ended December 31, 1997 by each
of the named executive officers and the number and value of unexercised options
held by such named executive officers as of December 31, 1997.

                AGGREGATED OPTION EXERCISES IN 1997 FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                                          VALUE OF
                                                                       NUMBER OF         UNEXERCISED
                                                                      UNEXERCISED       IN-THE-MONEY
                                                                      OPTIONS AT         OPTIONS AT
                                            SHARES                  FISCAL YEAR-END    FISCAL YEAR-END
                                          ACQUIRED ON    VALUE       EXERCISABLE/       EXERCISABLE/
                                           EXERCISE     REALIZED     UNEXERCISABLE      UNEXERCISABLE
                  NAME                        (#)         ($)             (#)                ($)
                  ----                    -----------   --------   -----------------   ---------------
<S>                                       <C>           <C>        <C>                 <C>
Steven B. Rash..........................   1,527,000       0       527,000/1,000,000         0/0
</TABLE>

EMPLOYMENT AGREEMENTS

     Steven B. Rash entered into a three-year employment agreement (the
"Agreement") with the Company dated July 15, 1995. Pursuant to the Agreement,
Mr. Rash is employed as President and Chief Executive Officer of the Company.
The Agreement provides for a salary of $135,000 per year with annual increases
plus bonuses of up to 50% and an option to purchase 600,000 shares of common
stock. In 1997 Mr. Rash's agreement was extended to December 31, 1999. The base
salary was increased to $165,000 per year, with a cash bonus of $30,000 to be
paid should the Company's revenues exceed $2 million in 1997. Options to
purchase an additional 900,000 shares of common stock at $.6875 per share were
granted.

     Effective December 15, 1997, Marshall Kerr entered into a two-year
employment agreement with the Company. The employment agreement provides for a
salary of $80,000 per year through January 31, 1998 and $108,000 annually
thereafter with annual increases as determined by the Board of Directors and
annual bonuses of up to 50% of the base salary. In addition, the Company granted
options to purchase 300,000 shares of common stock; 100,000 shares at $0.50 per
share and 200,000 shares at $.42 per share.

COMPENSATION COMMITTEES INTERLOCKS AND INSIDER PARTICIPATION

     Until June 1995, the Company did not have a Compensation Committee.
Compensation matters were determined by the Board of Directors. In June 1995,
the Board created and appointed a Compensation Committee. Effective November 26,
1996 the Board of Directors elected Messrs. Hoffman and Guazzoni to serve on the
Compensation Committee. Mr. Hoffman is a consultant of the Company and was Vice
President of Corporate Relations from July 1990 to December 1991 and from
December 1991 to June 28, 1995 served as

                                       28
<PAGE>   30

Vice President of Business Development. In addition, Mr. Hoffman served as the
Company's interim Treasurer from March 28, 1995 until June 28, 1995. (See Item
13, "Certain Relationship and Related Transactions.")

COMPENSATION OF DIRECTORS

     It has been the Company's policy to compensate the directors only for their
reasonable travel expenses in relation to in-person board meetings and
stockholder meetings. Effective November 22, 1996 the directors each received an
option to purchase 12,000 shares of common stock at an exercise price of $1.00
per share, to be vested November 22, 1997. For each board meeting attended,
either telephonically or in person, the directors received options to purchase
2,000 shares of common stock. The Chairman of the Board received an option to
purchase 15,000 shares of common stock vested upon issuance. At December 31,
1996 no one had been elected Chairman of the Board. New officers were elected
February 4, 1997 at which time Mr. Rash became Chairman.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information, as of March 2, 1998,
regarding the beneficial ownership of the common stock by (i) each person or
group known to the Company to beneficially own more than 5% of the outstanding
common stock, (ii) each director of the Company, (iii) certain executive
officers, individually, and (iv) all directors and officers as a group. As of
March 2, 1998, the Company had issued and outstanding 19,732,351 shares of
common stock.

<TABLE>
<CAPTION>
              NAME AND ADDRESS OF                    AMOUNT AND NATURE OF
              BENEFICIAL OWNER(1)                 BENEFICIAL OWNERSHIP(2)(3)   PERCENT OF CLASS
              -------------------                 --------------------------   ----------------
<S>                                               <C>                          <C>
Steven B. Rash..................................           528,900(4)                2.6%
Lawrence M. Hoffman.............................         1,275,674(5)                6.3%
  701 Mohican Court
  Morganville NJ
Claudio Guazzoni................................           975,306(6)                4.7%
  10 E. 76th Street
  New York, NY
All Directors and Officers as a Group (6
  persons)......................................         2,807,880(7)               12.6%
</TABLE>

---------------

(1) Unless otherwise specified, the address of each beneficial owner is American
    BioMed, Inc., 10077 Grogan's Mill Road, Suite 100, The Woodlands, Texas
    77380.

(2) Unless otherwise noted, the Company believes that all persons named in the
    table have sole voting and investment power with respect to all shares of
    common stock beneficially owned by them.

(3) A person is deemed to be the beneficial owner of securities that can be
    acquired by such person within 60 days upon the exercise of options or
    warrants or other convertible securities.

(4) Includes 527,000 shares which may be acquired within 60 days upon the
    exercise of vested options. Excludes options to purchase 1,000,000 shares
    not vested.

(5) Includes 425,000 shares issuable upon the exercise of warrants held by
    Aberlyn Capital Management ("Aberlyn Partnership"). Mr. Hoffman owns a
    limited partnership interest in Aberlyn Partnership, and is an officer,
    director and stockholder of Aberlyn Capital Management, Inc., which is a
    general partner of Aberlyn Partnership. Also, includes 547,000 shares which
    may be acquired within 60 days upon the exercise of options by Mr. Hoffman.

(6) Includes 953,306 shares issuable upon the exercise of warrants held by
    Zanett Capital or its assigns. Mr. Guazzoni is President and Chief Executive
    Officer of Zanett Capital, Inc.

(7) Includes 2,498,306 shares which may be acquired within 60 days upon the
    exercise of options or warrants.

                                       29
<PAGE>   31

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     For the period from inception, September 4, 1984, to December 31, 1997, the
Company made payments for legal, engineering and consulting services and
products and supplies provided by certain stockholders which amounted to
$1,089,869. Of this amount, $7,797, $37,500, and $50,000 related to the years
ended December 31, 1997, 1996 and 1995, respectively.

     On August 23, 1995 the Company sold its proprietary OmniCath(R) atherectomy
EPA patent to Guerbet, a stockholder of the Company, for $500,000 cash.

     Steven B. Rash entered into a three-year employment agreement with the
Company, dated as of July 15, 1995 (the "Agreement"). Pursuant to the Agreement,
Mr. Rash is employed as President and Chief Executive Officer of the Company.
The Agreement provides for a salary of $135,000 per year with annual increases,
plus bonuses of up to fifty percent, and options to purchase 600,000 shares of
common stock. In 1997 Mr. Rash's agreement was extended to December 31, 1999.
The base salary was increased to $165,000 per year, with a cash bonus of $30,000
to be paid should the Company's revenues exceed $2 million in 1997. Options to
purchase an additional 900,000 shares of common stock at $.6875 per share were
granted.

     Lawrence M. Hoffman, currently a director, stockholder and paid consultant
of the Company and formerly a Vice President, is a limited partner of Aberlyn
Capital Management Limited Partnership ("Aberlyn") and is an officer, director
and stockholder of Aberlyn Capital Management, Inc., the general partner of
Aberlyn. Effective December 31, 1992, the Company and Aberlyn entered into a
Patent Assignment and License Agreement (the "Patent and License Agreement")
pursuant to which the Company assigned patents owned by the subsidiary, Cathlab
Corporation (the "Cathlab Patents"), to Aberlyn in return for $500,000. The
Cathlab Patents were exclusively licensed back to the Company for three years
for a monthly license fee of $16,355, after which Aberlyn was required to
reassign the Cathlab Patents to the Company in exchange for $50,000. Under its
terms, if the Company declined to purchase the Cathlab Patents, the Patent and
License Agreement would automatically be extended for an additional nine months
for a monthly license fee of $17,099, after which the Cathlab Patents would
automatically revert back to the Company.

     The Company and Aberlyn entered into an equipment lease effective May 13,
1993 (the "Equipment Lease") pursuant to which the Company assigned certain
equipment to Aberlyn in consideration of $205,000. The equipment was exclusively
leased back to the Company for three years for a monthly fee of $6,706, after
which Aberlyn was required to return the equipment to the Company in exchange
for $20,500. Under the terms, if the Company opted not to purchase the
equipment, the Equipment Lease would automatically be extended for an additional
three months for a monthly payment of $7,011, after which the equipment would
automatically revert back to the Company.

     Effective August 13, 1993, the Company and Aberlyn entered into an
additional equipment lease (the "Second Equipment Lease") pursuant to which the
Company assigned certain equipment to Aberlyn in consideration of $100,000. The
equipment was exclusively leased back to the Company for three years for a
monthly fee of $3,271, after which Aberlyn was required to return the equipment
to the Company in exchange for $10,000. If the Company declined to purchase the
equipment, the term of the Second Equipment Lease was to be automatically
extended or an additional three months for a monthly payment of $3,420, after
which the equipment would automatically revert back to the Company.

     The Company and Aberlyn entered into an agreement effective March 28, 1994
whereby the terms of the Patent and License Agreement, the Equipment Lease and
the Second Equipment Lease were modified. The payment terms of the license fee
pursuant to the Patent and License Agreement were revised to semiannual payments
of $97,445 and the payment terms of the Equipment Lease were similarly revised
to semiannual payments of $39,100 and $20,281, respectively. In consideration to
Aberlyn for making these modifications, the Company issued warrants to Aberlyn
to purchase 150,000 shares of the Company's common stock at an exercise price of
$1.50 per share exercisable over a five-year period. On May 28, 1996, Aberlyn
and the Company reached an agreement to restructure the Leases which resulted in
a revised schedule of lease payments over a twenty-four month period, with the
initial payment commencing on June 1, 1996. The payments were based on an
outstanding principal amount of approximately $500,000 and total accrued
interest

                                       30
<PAGE>   32

of approximately $148,000. In addition, 115,000 shares of common stock were
issued in payment of consulting fees, investment banking service fees and
accumulated miscellaneous expenses totaling $115,728.

     Effective November 1, 1997, the Company and Aberlyn entered into
modification agreements of the Leases which revised the schedule of lease
payments and extended the maturity date to October 1, 1998.

     On February 18, 1996, the Company and Zanett Capital, Inc. ("Zanett"), a
financial consulting firm, signed an agreement whereby Zanett agreed to help the
Company raise capital pursuant to an offshore private placement of equity.
Claudio M. Guazzoni, a member of the Company's Board of Directors, is Zanett's
President and Chief Executive Officer. As a retainer for availability of
services by Zanett, the Company agreed to grant Zanett warrants to purchase
shares of common stock at a rate of 1 for every 10 shares of common stock or
warrants issued in connection with equity and bridge financings raised by
Zanett. Each of the warrants will be exercisable at an exercise price of $0.50
per share for five years from the date it is granted, which shall be the date of
the closing of the particular equity or bridge financing in question. During
1996 through the efforts of Zanett, the Company sold 1,250,001 shares of common
stock, 1,390 shares of Series A Preferred and 1,500 shares of Series B Preferred
pursuant to Regulation S of the Securities Act of 1933, as amended. In
connection with these placements, the Company issued warrants to purchase
811,310 shares of common stock to unrelated third-parties upon assignment of
such warrants by Zanett. In addition a 10% placement fee of approximately
$319,000 has been paid to Zanett or their designated representative in
connection with the sale of the Series A and Series B Preferred.

     In September 1996, Zanett was granted a warrant to purchase 25,000 shares
of common stock at $.9375 in connection with the placement of bridge financing.
The warrants are exercisable for five years.

     The Company does not have a policy against employing relatives. During the
years ended December 31, 1997, 1996 and 1995, the Company paid salaries and
wages to relatives of officers of the Company amounting to $7,797, $22,692, and
$51,600, respectively.

                                       31
<PAGE>   33

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     a. and d. Financial Statements and Financial Statement Schedule See Index
to Consolidated Financial Statements and Consolidated Financial Statement
Schedule on Page F-1 herein.

     b. Reports on Form 8-K

          None.

     c. Exhibits

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                             DESCRIPTION OF EXHIBIT
        -------                             ----------------------
<C>                      <S>
          2.1            -- Agreement and Plan of Merger among American BioMed, Inc.,
                            ABI Acquisition, Inc. and Cathlab Corporation dated March
                            30, 1992(3)
          3.1            -- Certificate of Incorporation.(1)
          3.2            -- By-laws.(1)
          3.3            -- Certificate of Designations, Preferences and Rights of
                            1996 Series A Convertible Preferred Stock(5)
          3.4            -- Certificate of Designations, Preferences and Rights of
                            1996 Series B Convertible Preferred Stock(5)
          3.5            -- Certificate of Designations, Preferences and Rights of
                            1997 Series C Convertible Preferred Stock(8)
          4.2            -- Specimen Common Stock Certificate(1)
         10.17           -- Summers Note, dated September 1990, between the Company
                            and David P. Summers, as amended(1)
         10.28           -- 1992 Stock Option Plan of the Company and forms of
                            incentive stock option agreement and non-qualified stock
                            option agreement(2)
         10.57           -- Patent License, Research & Development Agreement between
                            Wright Medical Technology, Inc. and American BioMed,
                            Inc.(2)
         10.69           -- Stipulation of Settlement, Scott Printing Corporation v.
                            American BioMed, Inc.(4)
         10.70           -- Employment contract with Steven B. Rash(4)
         10.71           -- Purchase of Technology Agreement, Guerbet, S.A.(4)
         10.80           -- 1996 Incentive Stock Option Plan(6)
         10.81           -- Aberlyn Schedule No. 3 to Master Lease Agreement No.
                            0001E and Patent Schedule No. 2 to Patent Assignment and
                            License Agreement No. 0001P, effective June 1, 1996(7)
         10.82           -- Securities Purchase Agreement, dated February 20, 1996,
                            between the Company and certain investors relating to the
                            issuance and sale of Common Stock and 200 shares of the
                            1996 Series A Convertible Preferred Stock(8)
         10.83           -- Securities Purchase Agreement, dated February 20, 1996,
                            between the Company and certain investors relating to the
                            issuance and sale of 1,190 shares of the 1996 Series A
                            Convertible Preferred Stock(8)
         10.84           -- Form of Registration Rights Agreement, dated February 20,
                            1996, between the Company and holders of the 1996 Series
                            A Convertible Preferred Stock(8)
</TABLE>

                                       32
<PAGE>   34

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                             DESCRIPTION OF EXHIBIT
        -------                             ----------------------
<C>                      <S>
         10.85           -- Securities Purchase Agreement, dated November 7, 1996,
                            between the Company and certain investors relating to the
                            issuance and sale of the 1996 Series B Convertible
                            Preferred Stock(8)
         10.86           -- Form of Registration Rights Agreement, dated November 7,
                            1996, between the Company and holders of the 1996 Series
                            B Convertible Preferred Stock(8)
         10.87           -- Securities Purchase Agreement, dated March 21, 1997,
                            between the Company and certain investors relating to the
                            issuance and sale of the 1997 Series C Convertible
                            Preferred Stock(8)
         10.88           -- Registration Rights Agreement, dated March 21, 1997,
                            between the Company and holders of the 1997 Series C
                            Convertible Preferred Stock(8)
         10.89           -- Lease Agreement dated June 19, 1997 between the Company
                            and Woodlands Office Equities -- '95 Limited
         10.90           -- Modification Agreement -- Patent Schedule No. 002 between
                            Aberlyn Capital Management Co., Inc. and the Company
         10.91           -- Modification Agreement -- Lease Schedule No. 003 between
                            Aberlyn Capital Management Co., Inc. and the Company
         10.92           -- Employment agreement with Marshall Kerr
         11              -- Computation of (Loss) per Common Share
         21              -- Subsidiaries of the Registrant(7)
         23              -- Consent of Coopers & Lybrand L.L.P.
         27              -- Financial Data Schedule
</TABLE>

---------------

(1) Incorporated by reference to the Company's Registration Statement on Form
    S-1, as amended, File No. 33-424372, dated August 4, 1992.

(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
    the year ended December 31, 1994.

(3) Incorporated by reference to the Company's Current Report on Form 8-K for
    April 30, 1992.

(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
    the year ended December 31, 1995.

(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
    the quarter ended September 30, 1996.

(6) Incorporated by reference to the Company's Proxy Statement for the November
    22, 1996 Annual Meeting.

(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
    the year ended December 31, 1996.

(8) Incorporated by reference to the Company's Annual Report on Form 10-K/A-1
    for the year ended December 31, 1996.

                                       33
<PAGE>   35

                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT
                                    SCHEDULE

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
CONSOLIDATED FINANCIAL STATEMENTS
  Report of Independent Accountants.........................   F-2
  Consolidated Balance Sheets at December 31, 1997 and
     1996...................................................   F-3
  Consolidated Statements of Operations for the years ended
     December 31, 1997, 1996 and 1995 and for the period
     from inception, September 4, 1984, to December 31,
     1997...................................................   F-4
  Consolidated Statements of Changes in Stockholders' Equity
     (Deficit) for the period from inception to December 31,
     1993, for the years ended December 31, 1997, 1996, and
     1995 and 1994 and for the period from inception,
     September 4, 1984, to December 31, 1997................   F-5
  Consolidated Statements of Cash Flows for the years ended
     December 31, 1997, 1996 and 1995.......................   F-7
  Notes to Consolidated Financial Statements................   F-8
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
  Report of Independent Accountants.........................  F-29
  Schedule II -- Valuation and Qualifying Accounts..........  F-30
</TABLE>

     All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission, which are not
presented, are not required under the related instructions or are inapplicable,
and therefore have been omitted.

                                       F-1
<PAGE>   36

                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
American BioMed, Inc.:

     We have audited the accompanying consolidated balance sheets of American
BioMed, Inc. and Subsidiaries (the "Company") (a development stage enterprise)
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows for the
years ended December 31, 1997, 1996 and 1995 and for the period from inception,
September 4, 1984, to December 31, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
BioMed, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for the years ended December 31, 1997, 1996
and 1995, and for the period from inception, September 4, 1984, to December 31,
1997, in conformity with generally accepted accounting principles.

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Notes 1 and 18 to the consolidated financial statements, the Company has
operated as a development stage enterprise since its inception by devoting
substantially all of its efforts to financial planning, raising capital,
research and development and developing markets for its products. Consequently,
as shown in the accompanying consolidated financial statements through December
31, 1997, the Company had a cumulative loss of $27,149,225 since its inception
and had a working capital deficit of ($627,151) at December 31, 1997. The above
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Accordingly, the Company's continued existence is dependent upon
its ability to obtain additional working capital, to develop and market its
products and, ultimately, upon its ability to attain profitable operations. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.

                                            COOPERS & LYBRAND L.L.P

Houston, Texas
March 31, 1998

                                       F-2
<PAGE>   37

                     AMERICAN BIOMED, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996

                                     ASSETS

<TABLE>
<CAPTION>
                                                                  1997            1996
                                                              ------------    ------------
<S>                                                           <C>             <C>
Current assets:
  Cash and cash equivalents.................................  $     82,789    $  1,183,613
  Accounts receivable, trade, net of Allowance for doubtful
    accounts of $57,167 and $57,500 for 1997 and 1996,
    respectively............................................       158,724         168,359
  Accounts receivable, other................................        13,716          19,848
  Inventories...............................................       648,957         462,097
  Other current assets......................................       144,713         277,195
                                                              ------------    ------------
         Total current assets...............................     1,048,899       2,111,112
Property and equipment, net.................................       167,991          81,315
Patents, net of accumulated amortization of $920,330 and
  $870,014 in 1997 and 1996, respectively...................       158,695         164,655
Goodwill, net of accumulated amortization of $697,475 and
  $574,391 in 1997 and 1996, respectively...................       533,361         656,444
Other assets................................................        36,110          55,625
                                                              ------------    ------------
         Total assets.......................................  $  1,945,056    $  3,069,151
                                                              ============    ============

                           LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Notes payable to stockholders and others..................  $    300,976    $  1,278,485
  Current maturities of long-term debt......................        41,694          38,404
  Current maturities of capital lease obligations...........       416,901         266,078
  Accounts payable..........................................       254,234         301,184
  Accrued liabilities.......................................       662,245         483,167
                                                              ------------    ------------
         Total current liabilities..........................     1,676,050       2,367,318
Long-term debt, net of current maturities...................        71,855         110,472
Capital lease obligations, net of current maturities........            --         302,766
Deferred revenue............................................       100,000         160,000
Commitments and contingencies
Stockholders' equity (deficit):
  Preferred stock, $.001 par value, 2,000,000 shares
    authorized,
  Series A: Convertible preferred stock, 1,390 shares
    authorized, 1,390 shares issued and outstanding at
    December 31, 1997 and 1996, $1,000 per share or
    $1,390,000 aggregate liquidation preference.............             1               1
  Series B: Convertible preferred stock, 2,500 shares
    authorized, 500 and 1,500 shares issued and outstanding
    at December 31, 1997 and 1996, $1,000 per share or
    $500,000 and $1,500,000 aggregate liquidation preference
    plus an additional 10% per year from the date of
    issuance................................................             1               2
  Series C: Convertible preferred stock, 125 shares
    authorized, 112 shares issued and outstanding at
    December 31, 1997, $20,000 per share or $2,240,000
    aggregate liquidation preference plus an additional 7%
    per year from the date of issuance......................            --              --
Common stock, $.001 par value, 50,000,000 shares authorized
  in 1997 and 1996, 18,457,426 and 13,544,019 shares issued
  at December 31, 1997 and 1996, respectively, of which
  68,323 shares are held in treasury........................        18,457          13,544
Additional paid-in capital..................................    27,479,517      24,741,670
Deficit accumulated during the Development stage............   (27,149,225)    (24,375,022)
Less treasury stock at cost, 68,323 shares..................      (251,600)       (251,600)
                                                              ------------    ------------
         Total stockholders' equity.........................        97,151         128,595
                                                              ------------    ------------
         Total liabilities and stockholders' equity.........  $  1,945,056    $  3,069,151
                                                              ============    ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                       F-3
<PAGE>   38

                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                         INCEPTION
                                        ENDED           ENDED           ENDED        SEPTEMBER 4, 1984,
                                     DECEMBER 31,    DECEMBER 31,    DECEMBER 31,     TO DECEMBER 31,
                                         1997            1996            1995               1997
                                     ------------    ------------    ------------    ------------------
<S>                                  <C>             <C>             <C>             <C>
Sales, net.........................  $   545,473     $   579,533     $   660,770        $  3,860,120
Cost of sales......................     (482,360)       (420,838)       (649,355)         (3,715,266)
                                     -----------     -----------     -----------        ------------
Gross profit.......................       63,113         158,695          11,415             144,854
                                     -----------     -----------     -----------        ------------
Operating expenses:
  Selling, general and
     administrative................   (2,075,695)     (1,718,595)     (2,169,591)        (17,532,630)
  Research and development.........     (648,049)       (640,792)       (537,962)         (7,898,042)
  Distributor settlement...........           --              --              --          (1,080,915)
                                     -----------     -----------     -----------        ------------
                                      (2,723,744)     (2,359,387)     (2,707,553)        (26,511,587)
                                     -----------     -----------     -----------        ------------
     Loss from operations..........   (2,660,631)     (2,200,692)     (2,696,138)        (26,366,733)
                                     -----------     -----------     -----------        ------------
Other income (expense):
  Interest income..................       44,200           4,252           7,239             153,934
  Interest expense.................     (183,538)       (313,914)       (276,688)         (2,878,976)
  Other income (expense)...........       25,766        (114,762)      1,561,203           1,942,550
                                     -----------     -----------     -----------        ------------
     Other income (expense), net...     (113,572)       (424,424)      1,291,754            (782,492)
                                     -----------     -----------     -----------        ------------
  Net loss.........................  $(2,774,203)    $(2,625,116)    $(1,404,384)       $(27,149,225)
  Less preferred stock dividends...           --      (1,183,413)             --          (1,183,413)
                                     -----------     -----------     -----------        ------------
  Net loss available to common
     shareholders..................  $(2,774,203)    $(3,808,529)    $(1,404,384)       $(28,332,638)
                                     ===========     ===========     ===========        ============
  Net loss per common share........  $      (.18)    $     (0.34)    $     (0.15)
                                     ===========     ===========     ===========
  Weighted average number of common
     shares outstanding............   15,528,231      11,310,592       9,362,198
                                     ===========     ===========     ===========
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                       F-4
<PAGE>   39

                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

      CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
                                                                                                       DEFICIT
                                                                                                     ACCUMULATED
                                             PREFERRED STOCK        COMMON STOCK       ADDITIONAL     DURING THE
                                             ----------------   --------------------     PAID-IN     DEVELOPMENT
                                              SHARES     PAR      SHARES       PAR       CAPITAL        STAGE
                                             --------   -----   ----------   -------   -----------   ------------
<S>                                          <C>        <C>     <C>          <C>       <C>           <C>
Issuance of $1 par value common stock on
  September 4, 1984........................                          1,000   $ 1,000
Redemption of $1 par value common stock....                         (1,000)   (1,000)
Issuance of $.001 par value common stock...                      1,000,000     1,000
Issuance of $.001 par value common stock at
  fair market value of services rendered...                        100,000       100   $    19,900
Issuance of Series A preferred stock.......   156,250   $ 156                              499,844
Issuance of common stock pursuant to a
  three-for-one stock split subsequent to
  December 31, 1990, retroactively
  applied..................................                      2,200,000     2,200        (2,200)
Redemption of common stock pursuant to a
  one-for 2.325 reverse stock split
  subsequent to December 31, 1990,
  retroactively applied....................                     (1,880,645)   (1,881)        1,881
Issuance of $.001 par value common stock in
  connection with Bridge Notes.............                        182,000       182        45,318
Issuance of stock purchase warrants........                                                100,000
Sale of common stock, net of offering
  costs....................................                        800,000       800     3,059,472
Conversion of Series A preferred stock.....  (156,250)   (156)     223,214       223           (67)
Conversion of $255,000 principal amount of
  debenture................................                         63,750        64       254,936
Exercise of underwriter's over allotment
  option, net of offering costs............                        111,700       112       483,367
Issuance of $.001 par value common stock in
  connection with acquisition of Freedom
  Machine, Inc.............................                         60,000        60       206,940
Conversion of $385,000 principal amount of
  debentures...............................                         96,250        96       384,904
Issuance of $.001 par value common stock in
  connection with acquisition of Cathlab
  Corporation..............................                        450,000       450     2,024,550
Issuance of $.001 par value common stock in
  connection with acquisition of VMS,
  Inc......................................                         27,777        28       124,971
Issuance of $.001 par value common stock in
  connection with 6% promissory note.......                         58,576        59       263,533
Issuance of $.001 par value common stock in
  connection with purchase of assets of
  SuperStat, Inc...........................                         18,182        18        81,801
Issuance of $.001 par value common stock in
  connection with a $500,000 loan from a
  bank.....................................                         79,365        79       357,064
Issuance of $.001 par value common stock in
  connection with Therex settlement........                         58,823        59       499,941
Issuance of Series B preferred stock, net
  of offering costs........................   287,500     288                            2,545,858
Exercise of stock purchase warrants........                        678,717       679     2,800,341
Issuance of $.001 par value common stock in
  connection with Therex settlement........                         77,000        77           (77)
Issuance of $.001 par value common stock in
  connection with consulting agreement.....                         50,000        50       174,950
Exercise of stock options..................                        166,880       167        38,795
Reacquire $.001 par value common stock
  originally issued in connection with
  Therex settlement........................
Treasury stock reissued, 67,500 common
  shares at cost...........................                                                  1,600
Issuance of 193,500 warrants in connection
  with 9% promissory notes.................                                                574,176
Dividend requirement on Series B preferred
  stock....................................                                               (135,209)
Conversion of Series B preferred stock into
  $.001 par value common stock.............  (287,500)   (288)   1,268,465     1,268       134,091
Sale of common stock for cash, net of
  offering costs...........................                      1,500,000     1,500     3,501,299
Net loss for the period....................                                                          $(16,559,366)
                                             --------   -----   ----------   -------   -----------   ------------
Balance, December 31, 1993.................        --      --    7,390,054   $ 7,390   $18,041,979   $(16,559,366)
                                             --------   -----   ----------   -------   -----------   ------------

<CAPTION>

                                                TREASURY STOCK
                                             --------------------
                                              SHARES      COSTS        TOTAL
                                             --------   ---------   ------------
<S>                                          <C>        <C>         <C>
Issuance of $1 par value common stock on
  September 4, 1984........................                         $      1,000
Redemption of $1 par value common stock....                               (1,000)
Issuance of $.001 par value common stock...                                1,000
Issuance of $.001 par value common stock at
  fair market value of services rendered...                               20,000
Issuance of Series A preferred stock.......                              500,000
Issuance of common stock pursuant to a
  three-for-one stock split subsequent to
  December 31, 1990, retroactively
  applied..................................                                  -0-
Redemption of common stock pursuant to a
  one-for 2.325 reverse stock split
  subsequent to December 31, 1990,
  retroactively applied....................                                  -0-
Issuance of $.001 par value common stock in
  connection with Bridge Notes.............                               45,500
Issuance of stock purchase warrants........                              100,000
Sale of common stock, net of offering
  costs....................................                            3,060,272
Conversion of Series A preferred stock.....                                  -0-
Conversion of $255,000 principal amount of
  debenture................................                              255,000
Exercise of underwriter's over allotment
  option, net of offering costs............                              483,479
Issuance of $.001 par value common stock in
  connection with acquisition of Freedom
  Machine, Inc.............................                              207,000
Conversion of $385,000 principal amount of
  debentures...............................                              385,000
Issuance of $.001 par value common stock in
  connection with acquisition of Cathlab
  Corporation..............................                            2,025,000
Issuance of $.001 par value common stock in
  connection with acquisition of VMS,
  Inc......................................                              124,999
Issuance of $.001 par value common stock in
  connection with 6% promissory note.......                              263,592
Issuance of $.001 par value common stock in
  connection with purchase of assets of
  SuperStat, Inc...........................                               81,819
Issuance of $.001 par value common stock in
  connection with a $500,000 loan from a
  bank.....................................                              357,143
Issuance of $.001 par value common stock in
  connection with Therex settlement........                              500,000
Issuance of Series B preferred stock, net
  of offering costs........................                            2,546,146
Exercise of stock purchase warrants........                            2,801,020
Issuance of $.001 par value common stock in
  connection with Therex settlement........                                  -0-
Issuance of $.001 par value common stock in
  connection with consulting agreement.....                              175,000
Exercise of stock options..................                               38,962
Reacquire $.001 par value common stock
  originally issued in connection with
  Therex settlement........................  (135,823)  $(500,000)      (500,000)
Treasury stock reissued, 67,500 common
  shares at cost...........................    67,500     248,400        250,000
Issuance of 193,500 warrants in connection
  with 9% promissory notes.................                              574,176
Dividend requirement on Series B preferred
  stock....................................                             (135,209)
Conversion of Series B preferred stock into
  $.001 par value common stock.............                              135,071
Sale of common stock for cash, net of
  offering costs...........................                            3,502,799
Net loss for the period....................                          (16,559,366)
                                             --------   ---------   ------------
Balance, December 31, 1993.................   (68,323)  $(251,600)  $  1,238,403
                                             --------   ---------   ------------
</TABLE>

                                       F-5
<PAGE>   40
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

               CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS'
                        EQUITY (DEFICIT) -- (CONTINUED)
<TABLE>
<CAPTION>
                                                                                                       DEFICIT
                                                                                                     ACCUMULATED
                                             PREFERRED STOCK        COMMON STOCK       ADDITIONAL     DURING THE
                                             ----------------   --------------------     PAID-IN     DEVELOPMENT
                                              SHARES     PAR      SHARES       PAR       CAPITAL        STAGE
                                             --------   -----   ----------   -------   -----------   ------------
<S>                                          <C>        <C>     <C>          <C>       <C>           <C>
Issuance of shares in connection with
  private placements.......................                        684,395   $   684   $   566,734
Issuance of shares in connection with
  Officer subscription.....................                         40,000        40        31,460
Issuance of shares to an officer in
  connection with private placement........                         15,000        15         2,985
Exercise of stock options..................                        400,000       400       224,600
Issuance of shares to employees in lieu of
  salary...................................                         11,500        12        11,738
Issuance of shares previously paid for but
  not issued...............................                          8,548         9            (9)
Conversion of shareholder loan.............                        111,111       111        49,889
Issuance of shares in payment of
  expenses.................................                        117,812       118        70,396
Issuance of shares for services............                        524,554       524        55,726
Additional accrual of expenses related to
  1993 offering............................                                                (24,795)
Net loss for the year......................                                                          $ (3,786,156)
                                             --------   -----   ----------   -------   -----------   ------------
Balance, December 31, 1994.................        --      --    9,302,974     9,303    19,030,703    (20,345,522)
                                             --------   -----   ----------   -------   -----------   ------------
Issuance of shares in connection with
  officer loan.............................                          2,000         2
Issuance of shares to an officer in lieu of
  salary...................................                         15,000        15         6,161
Issuance of shares in payment of
  expenses.................................                         34,300        34        47,239
Issuance of shares in connection with
  private placement........................                        151,000       151        60,349
Issuance of options........................                                                 37,500
Issuance of warrants.......................                                                  8,400
Other......................................                                                   (206)
Net loss for the year......................                                                            (1,404,384)
                                             --------   -----   ----------   -------   -----------   ------------
Balance, December 31, 1995.................        --      --    9,505,274     9,505    19,190,146    (21,749,906)
                                             --------   -----   ----------   -------   -----------   ------------
Issuance of shares in connection with
  private placements, net of offering
  costs....................................     2,890   $   3    1,250,001     1,250     2,870,066
Exercise of stock options..................                        197,000       197       142,220
Exercise of warrants.......................                        744,165       744       390,581
Issuance of options........................                                                237,087
Issuance of shares in payment of certain
  liabilities..............................                      1,245,579     1,246     1,545,263
Issuance of shares for services............                        600,000       600       366,900
Issuance of shares to individuals..........                          2,000         2         3,229
Other......................................                                                 (3,822)
Net loss for the year......................                                                            (2,625,116)
                                             --------   -----   ----------   -------   -----------   ------------
Balance, December 31, 1996.................     2,890       3   13,544,019    13,544    24,741,670    (24,375,022)
                                             --------   -----   ----------   -------   -----------   ------------
Issuance of shares in connection with
  private placements, net of offering
  costs....................................       125                                    2,212,410
Exercise of stock options..................                         20,000        20         3,730
Exercise of warrants.......................                        802,583       803       319,230
Conversion of preferred stock..............    (1,013)     (1)   3,881,102     3,881        (3,880)
Issuance of shares in payment of certain
  liabilities..............................                        172,222       172       178,114
Issuance of shares for services............                         37,500        37        28,243
Net loss for the year......................                                                            (2,774,203)
                                             --------   -----   ----------   -------   -----------   ------------
Balance, December 31, 1997.................     2,002   $   2   18,457,426   $18,457   $27,479,517   $(27,149,225)
                                             ========   =====   ==========   =======   ===========   ============

<CAPTION>

                                                TREASURY STOCK
                                             --------------------
                                              SHARES      COSTS        TOTAL
                                             --------   ---------   ------------
<S>                                          <C>        <C>         <C>
Issuance of shares in connection with
  private placements.......................                         $    567,418
Issuance of shares in connection with
  Officer subscription.....................                               31,500
Issuance of shares to an officer in
  connection with private placement........                                3,000
Exercise of stock options..................                              225,000
Issuance of shares to employees in lieu of
  salary...................................                               11,750
Issuance of shares previously paid for but
  not issued...............................
Conversion of shareholder loan.............                               50,000
Issuance of shares in payment of
  expenses.................................                               70,514
Issuance of shares for services............                               56,250
Additional accrual of expenses related to
  1993 offering............................                              (24,795)
Net loss for the year......................                           (3,786,156)
                                             --------   ---------   ------------
Balance, December 31, 1994.................   (68,323)  $(251,600)    (1,557,116)
                                             --------   ---------   ------------
Issuance of shares in connection with
  officer loan.............................                                    2
Issuance of shares to an officer in lieu of
  salary...................................                                6,176
Issuance of shares in payment of
  expenses.................................                               47,273
Issuance of shares in connection with
  private placement........................                               60,500
Issuance of options........................                               37,500
Issuance of warrants.......................                                8,400
Other......................................                                 (206)
Net loss for the year......................                           (1,404,384)
                                             --------   ---------   ------------
Balance, December 31, 1995.................   (68,323)   (251,600)    (2,801,855)
                                             --------   ---------   ------------
Issuance of shares in connection with
  private placements, net of offering
  costs....................................                            2,871,319
Exercise of stock options..................                              142,417
Exercise of warrants.......................                              391,325
Issuance of options........................                              237,087
Issuance of shares in payment of certain
  liabilities..............................                            1,546,509
Issuance of shares for services............                              367,500
Issuance of shares to individuals..........                                3,231
Other......................................                               (3,822)
Net loss for the year......................                           (2,625,116)
                                             --------   ---------   ------------
Balance, December 31, 1996.................   (68,323)   (251,600)       128,595
                                             --------   ---------   ------------
Issuance of shares in connection with
  private placements, net of offering
  costs....................................                            2,212,410
Exercise of stock options..................                                3,750
Exercise of warrants.......................                              320,033
Conversion of preferred stock..............                                   --
Issuance of shares in payment of certain
  liabilities..............................                              178,286
Issuance of shares for services............                               28,280
Net loss for the year......................                           (2,774,203)
                                             --------   ---------   ------------
Balance, December 31, 1997.................   (68,323)  $(251,600)  $     97,151
                                             ========   =========   ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                       F-6
<PAGE>   41

                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                            INCEPTION,
                                                                                                           SEPTEMBER 4,
                                                               YEAR ENDED     YEAR ENDED     YEAR ENDED      1984, TO
                                                              DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                                                  1997           1996           1995           1997
                                                              ------------   ------------   ------------   ------------
<S>                                                           <C>            <C>            <C>            <C>
Cash flows from operating activities:
  Net loss..................................................  $(2,774,203)   $(2,625,116)   $(1,404,384)   $(27,149,225)
                                                              -----------    -----------    -----------    ------------
  Adjustments to reconcile net loss to cash used by
    operating activities
    Depreciation and amortization...........................      237,633        334,012        660,539       3,013,200
    Write off of goodwill...................................                                    120,000         120,000
    Expenses paid by transfer of equipment..................                                      3,380          37,134
    Loss (gain) on sale of assets...........................                      24,972       (501,043)       (476,071)
    Interest expense recorded upon issuance of common stock
      and warrants in connection with notes payable.........                                                  1,250,907
    Issuance of common stock and warrants for services......                     604,587         53,245       1,066,347
    Write off of note receivable from officer...............                                                     25,000
    Noncash compensation....................................                                     45,900          45,900
    Gain on sale of investment securities...................                                                     (4,190)
    Distributor settlement..................................                                                    625,915
    Write off of investment in joint venture................                                                    227,256
    Write off of patents....................................                         600                         79,167
    Write off of obsolete inventory.........................                                     43,325         367,688
  Changes in operating assets and liabilities:
    Accounts receivable, net................................       15,767          2,570        (97,115)       (114,882)
    Inventories.............................................     (186,860)       (91,967)       (74,007)     (1,111,084)
    Other assets............................................      181,378         51,145        (57,495)        168,432
    Accounts payable........................................      (33,460)      (135,640)      (203,921)        971,348
    Accrued liabilities.....................................      332,553        239,973        (12,142)      1,135,847
    Deferred revenue........................................      (60,000)       (60,000)       (60,000)        100,000
                                                              -----------    -----------    -----------    ------------
        Total adjustments...................................      487,011        970,252        (79,334)      7,527,914
                                                              -----------    -----------    -----------    ------------
        Net cash used by operating activities...............   (2,287,192)    (1,654,864)    (1,483,718)    (19,621,311)
                                                              -----------    -----------    -----------    ------------
Cash flows from investing activities:
  Capital expenditures......................................     (142,206)       (46,773)        (1,076)       (577,432)
  Issuance of notes receivable..............................                                                    (85,000)
  Proceeds from repayment of notes receivable...............                                                     35,000
  Investments in patents....................................      (44,356)       (31,414)       (51,877)       (481,344)
  Investment in joint venture...............................                                     (2,015)       (229,271)
  Organization costs........................................                                                     (1,000)
  Purchase of investment securities.........................                                                     (4,391)
  Proceeds from sale of investment securities...............                                                      8,581
  Proceeds from sale of assets..............................        1,516          1,264        507,113         509,893
  Cash acquired in acquisition of Freedom Machine...........                                                      6,338
  Cash acquired in acquisition of Cathlab Corporation.......                                                      6,446
                                                              -----------    -----------    -----------    ------------
        Net cash provided (used) by investing activities....     (185,046)       (76,923)       452,145        (812,180)
                                                              -----------    -----------    -----------    ------------
Cash flows from financing activities:
  Cash dividends on preferred stock.........................                                                       (138)
  Offering costs............................................     (287,590)      (322,859)                      (940,243)
  Financing costs...........................................                                                    (59,309)
  Proceeds from notes payable to banks......................                                                  2,333,880
  Proceeds from notes payable to stockholders...............                      34,750                      1,225,921
  Proceeds from notes payable to others.....................      116,250      1,835,576      1,688,560       5,858,587
  Repayments of notes payable to bank.......................                      (5,000)                    (2,070,000)
  Repayments of notes payable to stockholders...............                    (286,260)                      (822,992)
  Repayments of notes payable to others.....................   (1,129,086)    (1,932,618)      (614,145)     (5,904,103)
  Proceeds from patent assignment and leaseback.............                                                    500,000
  Proceeds from equipment assignment and leaseback..........                                                    305,000
  Principal payments under capital lease obligations........     (151,943)       (99,278)      (115,411)       (782,110)
  Proceeds from sale of debentures..........................                                                    640,000
  Proceeds from sale of preferred stock.....................    2,500,000      2,890,356                      8,436,502
  Proceeds from sales of common stock and exercise of
    unregistered warrants...................................      320,033        694,556         60,500       9,054,350
  Proceeds from exercise of stock options...................        3,750         97,000                        339,917
  Treasury stock acquired...................................                                                   (500,000)
  Proceeds from issuance of registered stock purchase
    warrants................................................                                                    100,000
  Proceeds from exercise of registered stock purchase
    warrants................................................                                                  2,801,018
                                                              -----------    -----------    -----------    ------------
        Net cash provided by financing activities...........    1,371,414      2,906,223      1,019,504      20,516,280
                                                              -----------    -----------    -----------    ------------
Net increase (decrease) in cash and cash equivalents........   (1,100,824)     1,174,436        (12,069)         82,789
Cash and cash equivalents at beginning of period............    1,183,613          9,177         21,246
                                                              -----------    -----------    -----------    ------------
Cash and cash equivalents at end of period..................  $    82,789    $ 1,183,613    $     9,177    $     82,789
                                                              ===========    ===========    ===========    ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                       F-7
<PAGE>   42

                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     American BioMed, Inc. (the "Company") was incorporated on September 4,
1984, for the purpose of developing, manufacturing and marketing medical,
surgical and diagnostic devices. The Company markets its products to health care
providers that are high volume users of angioplasty, atherectomy and stent
devices, to third-party distributors and to independent representatives that are
both geographically located in, and sell in North and South America, Western
Europe, the Middle East, the Far East and Southeast Asia. Domestic and foreign
export sales comprise approximately 34.5% and 65.5%, respectively, of the
Company's sales. The percentage of sales by geographic region is as follows:
34.5% in the United States, 16.9% in Italy, 15.7% in other European countries,
12.0% in South America, and 20.9% in other countries. The Company faces
competition from primarily two other companies. The Company has operated as a
development stage enterprise since its inception by devoting substantially all
of its efforts to research and development, developing markets for its products
and raising capital to support these efforts. The following is a summary of the
Company's significant accounting policies.

  Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Cathlab Corporation and Freedom Machine,
Inc., after elimination of all intercompany accounts and transactions. Effective
September 30, 1996, the Company dissolved Freedom Machine, Inc. and all
remaining assets were transferred to the Company. The Company operates in a
single segment, which accounts for in excess of 90% of the Company's total
revenues, loss and identifiable assets.

     The Company's financial statements have been prepared using accounting
principles applicable to a going concern, which contemplates the realization of
assets and liquidation of liabilities in the ordinary course of business. The
financial statements do not include any adjustments relating to the
recoverability and classifications of recorded assets and liabilities that might
be necessary should the Company be unable to continue in existence.

  Cash and Cash Equivalents

     For purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with an original maturity date of three
months or less to be cash equivalents. The Company primarily invests its excess
cash in deposits with major banks and other financial institutions, and at
times, these deposits may exceed federally insured limits. The Company has not
experienced any losses in such accounts. The Company selects depository
institutions based upon management's review of the financial stability of the
institution. For these short-term instruments, the carrying amount approximates
estimated fair value.

  Inventories

     Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out (FIFO) method.

  Property and Equipment

     Property and equipment are recorded at cost. Maintenance and repairs that
do not improve or extend the life of the assets are expensed as incurred.
Expenditures for renewals and betterments are capitalized. The cost of assets
retired and the related accumulated depreciation are removed from the accounts
and any gain or loss is included in the results of operations when incurred.
Depreciation for property and equipment is calculated

                                       F-8
<PAGE>   43
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

using the straight-line method over the estimated useful lives of the assets
(one to seven years) for financial reporting purposes and the modified
accelerated cost recovery system for tax reporting purposes.

  Technology and Patents

     Patents represent the cost of obtaining the rights to utilize and develop
certain atherectomy catheters, heart-assist pumps and related devices. The costs
of the patents are amortized using the straight-line method over the estimated
useful lives of the patents (5 years). The market for the Company's products is
characterized by rapidly changing technology, evolving industry standards and
changing customer needs. The Company believes that its future success will
depend, in part, upon its ability to change, identify and develop technical
innovations and apply them to new products designed for specific applications.
The Company's success depends, in part, on its ability to continue to have
patent protection for its products, maintain trade secret protection and operate
without infringing on the proprietary rights of others. The Company intends to
vigorously defend its patents against any infringements. The Company has been
issued several patents and several others are pending, all of which were
internally developed.

  Goodwill

     Goodwill represents the excess of the purchase price of acquired companies
over the estimated fair value of the net assets at the date of acquisition and
is being amortized using the straight-line method over ten years. The purchase
price is allocated to assets and liabilities based upon their fair values.
Amounts allocated to intangible assets are the same for financial and tax
reporting purposes. The Company periodically compares the carrying value of its
goodwill to the anticipated undiscounted future operating income from the
businesses whose acquisition gave rise to the goodwill and for 1997 no
impairment is indicated or expected.

  Long-Lived Assets

     In fiscal year 1996 the Company adopted the Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Based on the review of the Company's long-lived assets, adoption of
SFAS 121 did not have a material impact on its financial position, results of
operations or cash flows.

  Other Assets

     Other assets consist of membership fees and long-term deposits.

     The Company has adopted Financial Accounting Standards Board ("FASB" )
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" ("SFAS 129"). SFAS 129 requires all entities, public
and nonpublic that have issued securities which provide evidence of debt or
ownership or a related right to adequately disclose within the financial
statement, information regarding the Company's capital structure and is
effective for financial statements issued for periods ending after December 15,
1997.

  Revenue Recognition

     Revenue is recognized when products are shipped.

                                       F-9
<PAGE>   44
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Research and Development

     Research and development costs are expensed as incurred.

  Loss Per Share

     The Company has adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128). SFAS 128 specifies the computation, presentation and disclosure
requirements for earnings per share. Basic earnings per share is computed based
on the weighted average number of shares of common stock and common stock
equivalents outstanding during the periods. Diluted earnings per share includes
the number of shares issuable upon exercise of stock options, less the number of
shares that could have been repurchased with the exercise proceeds, using the
treasury stock method. The effect of the computation is antidilutive due to
continuing losses, therefore only basic earnings per share is presented.

  Concentration of Credit Risk

     The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on its trade receivables. Reserves are
maintained for potential credit losses, and such losses have been within
management's expectations.

  Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

  Regulation

     The Company's medical equipment is subject to review by the United States
Food and Drug Administration (the "FDA"). The FDA regulates and must approve the
manufacture, distribution and promotion of medical devices in the United States.
Various states and foreign countries in which the Company's products may be sold
impose additional regulatory requirements. Certain of the Company's products
have received marketing clearance from the FDA through the 510(k) Notification
process, other products are pending FDA approval, and other products are being
evaluated.

  Third-Party Reimbursement

     The Company sells its products to distributors, hospitals, physicians and
other health care providers for use in furnishing care to their patients.
Substantially all except the distributors rely on third-party payors,
principally Medicare, Medicaid, and private health insurance plans, to reimburse
all or part of the costs or fees associated with the medical procedures
performed. While the Company cannot predict the cost of its devices, or the
procedures to be performed with its products, or the relative cost and efficacy
of competing products or procedures, changes in third-party payor reimbursement
practices regarding the procedures performed with medical devices sold by the
Company may adversely affect the Company.

                                      F-10
<PAGE>   45
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Millennium Change

     The Company installed vendor upgrades for each of its computer-based
applications that will accommodate the millennium change. The Company does not
believe that the millennium change will have an adverse impact on its
operations.

  Recent Pronouncements

     The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 established standards for reporting and display of comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. It requires the items of other
comprehensive income be classified by their nature and the accumulated balance
of other comprehensive income be displayed separately from retained earnings and
additional paid-in capital in the equity section. SFAS 130 is effective for
fiscal years beginning after December 15, 1997 and application is to be adopted
at the beginning of the fiscal year. The Company has not yet determined the
impact that the adoption of SFAS 130 will have on its presentation of financial
information.

     The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131") which is effective for fiscal
years beginning after December 15, 1997. SFAS 131 establishes standards
requiring public business enterprises to report information about operation
segments in annual financial statements on the basis that is used internally for
evaluating segment performance and allocating resources, and requires selected
information be reported in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers.

2. INVENTORIES:

     Inventories consisted of the following:

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1997        1996
                                                              --------    --------
<S>                                                           <C>         <C>
Raw materials...............................................  $225,340    $178,762
Work in process.............................................   169,657     157,114
Finished Goods..............................................   253,960     126,221
                                                              --------    --------
                                                              $648,957    $462,097
                                                              ========    ========
</TABLE>

3. PROPERTY AND EQUIPMENT, NET:

     Property and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                1997         1996
                                                              ---------    ---------
<S>                                                           <C>          <C>
Furniture and fixtures......................................  $  72,887    $  51,133
Machinery and equipment.....................................    733,577      627,917
Leasehold improvements......................................     28,949       15,673
Equipment under capital lease agreements....................     24,243       24,243
                                                              ---------    ---------
                                                                859,656      718,966
Less accumulated depreciation and amortization..............   (691,665)    (637,651)
                                                              ---------    ---------
                                                              $ 167,991    $  81,315
                                                              =========    =========
</TABLE>

                                      F-11
<PAGE>   46
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Included in accumulated depreciation and amortization at December 31, 1997
and 1996 is $23,865 and $22,195, respectively, of accumulated amortization on
equipment acquired under capital lease agreements. Depreciation expense for the
years ended December 31, 1997, 1996 and 1995 was approximately $54,000, $133,000
and $191,000, respectively.

4. GOODWILL

     In November 1995 the Company sold certain assets and the associated
customer base of the catheter hole punch operations to a related party.
Accordingly, the Company wrote off approximately $120,000 of goodwill associated
with these assets.

5. DEFERRED REVENUE

     On August 26, 1994, the Company signed a Patent License, Research &
Development Agreement with Wright Medical Technologies, Inc. (WMT) in which the
Company licensed to WMT the world-wide manufacturing and distribution rights to
the "spinal dissector". The Company received a $300,000 license fee and will
receive 5% royalty from sales by WMT through the life of the patent. The Company
granted to WMT a stock purchase warrant for 150,000 shares with an exercise
price of $2.00. The warrant is exercisable through August 1999. The contract
called for the Company to continue to develop the spinal dissector on behalf of
WMT and granted the Company the first right of refusal for the manufacturing of
the spinal dissector. The Company performed and received additional fees for
development services of $2,400 during the year ended December 31, 1995. No
development fees were included in revenues for the year ended December 31, 1997
and 1996. The $300,000 license fee is being amortized over five years, the life
the Company uses to amortize patents. The unamortized balance of $100,000 and
$160,000 is reflected as deferred revenue as of December 31, 1997 and 1996,
respectively.

                                      F-12
<PAGE>   47
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. NOTES PAYABLE AND LONG-TERM DEBT:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                1997         1996
                                                              --------    ----------
<S>                                                           <C>         <C>
Notes payable to stockholders and others consisted of the
  following:
Uncollateralized promissory note to stockholder, bearing
  interest at 10%, payable quarterly with principal due on
  demand....................................................  $242,450    $  242,450
Note payable to an insurance company bearing interest at
  8.7% per year payable in monthly installments of $5,298
  including interest, maturing August 8, 1997...............        --        36,035
Note payable to an insurance company bearing interest at
  8.7% per year, payable in monthly installments of $5,298
  including interest, maturing August 8, 1998...............    41,035            --
Note payable to an insurance company bearing interest at
  7.75% per year payable in monthly installments of $4,213
  including interest, maturing January 1, 1998..............     4,186            --
Note payable to an insurance company payable in non-interest
  bearing quarterly installments of $5,733, maturing April
  9, 1998...................................................    10,319            --
Note payable to an insurance company payable in non-interest
  bearing quarterly installments of $1,493, maturing April
  14, 1998..................................................     2,986            --
Uncollateralized note payable to a company bearing interest
  at 12% per year, maturing January 27, 1997................        --     1,000,000
                                                              --------    ----------
                                                              $300,976    $1,278,485
                                                              ========    ==========
Long-term debt consisted of the following:
Note payable to a law firm bearing interest at 8.25% per
  year payable in monthly installments of $3,858 including
  interest, maturing August 1, 2000.........................  $113,549    $  148,876
Less current maturities.....................................   (41,694)      (38,404)
                                                              --------    ----------
                                                              $ 71,855    $  110,472
                                                              ========    ==========
</TABLE>

     The Company has failed to make monthly payments to the law firm when due.
Under the terms of the note agreement, the law firm can elect to impose an
interest rate of 18%. The law firm has not made this election.

     Future maturities of notes payable and long term debt are as follows:

<TABLE>
<S>                                                         <C>
1998......................................................  $342,670
1999......................................................    41,927
2000......................................................    29,928
                                                            --------
                                                            $414,525
                                                            ========
</TABLE>

                                      F-13
<PAGE>   48
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. ACCRUED LIABILITIES:

     Accrued liabilities consisted of the following:

<TABLE>
<CAPTION>
                                                                  DECEMBER 31
                                                              --------------------
                                                                1997        1996
                                                              --------    --------
<S>                                                           <C>         <C>
Accrued interest payable....................................  $208,007    $133,129
Accrued payroll and related taxes...........................   122,306     132,672
Accrued offering costs......................................   102,000     102,000
Other.......................................................   229,932     115,366
                                                              --------    --------
                                                              $662,245    $483,167
                                                              ========    ========
</TABLE>

8. COMMITMENTS AND CONTINGENCIES:

  Lease Obligations

     The Company leases certain patents and equipment under agreements
classified as capital leases. In addition, the Company leases its office space
and other properties under noncancelable operating leases through November 2002.
Future minimum payments under the capital leases and noncancelable operating
leases with initial or remaining terms of one year or more consisted of the
following at December 31, 1997:

<TABLE>
<CAPTION>
                                                              CAPITAL     OPERATING
                                                               LEASES      LEASES
                                                              --------    ---------
<S>                                                           <C>         <C>
1998........................................................  $470,259    $146,906
1999........................................................                55,850
2000........................................................                27,026
2001........................................................                 5,640
2002........................................................                 3,488
                                                              --------    --------
Total minimum lease payments................................   470,259    $238,910
                                                                          ========
Amounts representing interest...............................   (53,358)
                                                              --------
Present value of future lease payments......................   416,901
Less current maturities.....................................  (416,901)
                                                              --------
                                                              $    -0-
                                                              ========
</TABLE>

     Rental expense under operating leases for the years ended December 31,
1997, 1996 and 1995 and for the period from inception, September 4, 1984, to
December 31, 1997 amounted to $151,705, $157,972, $243,881, and $1,282,835,
respectively.

  Litigation

     On December 8, 1994, a vendor commenced a lawsuit against the Company
regarding unpaid invoices in the amount of $124,759 plus attorney fees and
accrued interest. On June 15, 1995, the parties to the lawsuit executed a
Stipulation of Settlement, a Consent Judgment and a Stipulation of Dismissal to
be held in escrow. The Company agreed to pay $125,000 to the vendor under the
settlement agreement; $25,000 was paid upon execution of this stipulation and
the balance was due on or before October 31, 1995. The amount of $100,000 is
included in accounts payable at December 31, 1995. The balance was paid through
the issuance of 116,145 shares of the Company's common stock in 1996. The vendor
sold the shares for less than the amount owing under the settlement agreement
including applicable interest and legal fees. The balance of approximately
$55,000 has been properly accrued in 1997.

                                      F-14
<PAGE>   49
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In May 1997, a former officer and director of the Company filed a lawsuit
alleging oppressive action toward a minority shareholder, breach of contract,
wrongful termination and unpaid debts and advances. The Company is vigorously
contesting this lawsuit. The February 1998 mediation conference, which was
mandated by the Court, did not result in a settlement agreement and the case is
scheduled for trial in 1998. The Company is unable to make a meaningful analysis
of possible or likely damages, if any.

     In August 1997, a former officer and director of the Company filed a
lawsuit alleging breach of contract and is seeking specific performance and
monetary damages. The Company is vigorously contesting this lawsuit. The Company
has accrued $125,000 which is management's best estimate of the ultimate
liability, if any. The resolution of this matter may have a material adverse
impact on the Company's financial position, results of operations or cash flows.

     In September 1997, a former distributor filed a lawsuit alleging the letter
agreement terminating their distribution agreement was breached by the Company
due to the non-issuance of options to purchase 437,500 shares of common stock at
$0.40 per share. These options have been properly reserved, but have not been
issued. Management believes the resolution of this matter will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.

     The Company is occasionally a party to litigation (other than that
specifically noted) arising in the ordinary course of business. Management
regularly analyzes current information and, as necessary, provides accrual for
probable liabilities for the eventual disposition of the matter. In the opinion
of management, the ultimate outcome of these matters will not materially affect
the Company's financial position, results of operations or cash flows.

9. FEDERAL INCOME TAXES:

     At December 31, 1997, the Company had net operating loss (NOL) and research
and development (R&D) credit carryforwards available to offset future taxable
income approximately as follows:

<TABLE>
<CAPTION>
                    YEAR EXPIRES                         N O L        R & D
                    ------------                      -----------    --------
<S>                                                   <C>            <C>
  2003..............................................  $    71,500
  2004..............................................       14,300
  2005..............................................      450,300    $  7,635
  2006..............................................    1,462,000      50,550
  2007..............................................    3,122,800     143,632
  2008..............................................    7,432,100     163,052
  2009..............................................    2,181,300      73,637
  2010..............................................      925,000      34,286
  2011..............................................    3,409,000      41,669
  2012..............................................    2,456,000      33,400
                                                      -----------    --------
                                                      $21,524,300    $547,861
                                                      ===========    ========
</TABLE>

     Net operating loss carryforwards for financial reporting purposes and
alternative minimum tax reporting purposes are approximately the same as those
under the regular tax method. Special limitations exist under the tax law which
may restrict the utilization of the regular tax and alternative minimum tax net
operating loss carryforwards. The amount of this restriction, if any, has not
been determined.

                                      F-15
<PAGE>   50
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company adopted the liability method of accounting for income taxes
pursuant to Statement of Financial Accounting Standards No. 109 (SFAS 109)
"Accounting For Income Taxes". Under this method, deferred income taxes are
recorded to reflect the tax consequences on future years of temporary
differences between the tax basis of assets and liabilities and their financial
amounts at year-end. The Company provides a valuation allowance to reduce
deferred tax assets to their net realizable value. The tax-effected components
of deferred tax assets at December 31, 1997 and 1996, are as follows:

<TABLE>
<CAPTION>
                                                               1996           1997
                                                            -----------    -----------
<S>                                                         <C>            <C>
Total deferred tax assets
Net operating losses and other............................  $ 8,827,000    $ 7,995,000
Valuation allowance.......................................   (8,827,000)    (7,995,000)
                                                            -----------    -----------
                                                            $       -0-    $       -0-
                                                            ===========    ===========
</TABLE>

     The Company has significant net operating loss carryforwards for which
realization of tax benefits is uncertain and therefore all deferred tax assets
have been fully reserved at December 31, 1997 and 1996, respectively. The change
in the total valuation allowance for the year ended December 31, 1997 and 1996
was a net increase of approximately $832,000 and $1,159,000, respectively.
Contributing primarily to this change were operating losses incurred during
1997.

10. RELATED PARTY TRANSACTIONS:

     For the period from inception, September 4, 1984, to December 31, 1997, the
Company made payments for legal, engineering and consulting services and
products and supplies provided by certain stockholders which amounted to
$1,089,869. Of this amount, $7,797, $37,500, and $50,000 related to the years
ended December 31, 1997, 1996 and 1995, respectively.

     On August 23, 1995 the Company sold its proprietary OmniCath(R) atherectomy
EPO patent to Guerbet S.A., a stockholder of the Company, of Paris, France for
$500,000 cash.

     Steven B. Rash entered into a three-year employment agreement with the
Company, dated as of July 15, 1995 (the "Agreement"). Pursuant to the Agreement,
Mr. Rash is employed as President and Chief Executive Officer of the Company.
The Agreement provides for a salary of $135,000 per year with annual increases,
plus bonuses of up to fifty percent, and options to purchase 600,000 shares of
common stock at $0.50 per share. The options vest at varying times during the
term of Mr. Rash's three-year employment agreement. In 1997 Mr. Rash's agreement
was extended to December 31, 1999. The base salary was increased to $165,000 per
year, with a cash bonus of $30,000 to be paid should the Company's revenues
exceed $2 million in 1997. Options to purchase an additional 900,000 shares of
common stock at $.6875 per share were granted.

     A director, stockholder and paid consultant of the Company and formerly a
Vice President, is a limited partner of Aberlyn Capital Management Limited
Partnership ("Aberlyn") and is an officer, director and stockholder of Aberlyn
Capital Management, Inc., the general partner of Aberlyn. Effective December 31,
1992, the Company and Aberlyn entered into a Patent Assignment and License
Agreement (the "Patent and License Agreement") pursuant to which the Company
assigned patents as collateral which are owned by the subsidiary, Cathlab
Corporation (the "Cathlab Patents"), to Aberlyn in return for $500,000. The
Cathlab Patents were exclusively licensed back to the Company for three years
for a monthly license fee of $16,355, after which Aberlyn was required to
reassign the Cathlab Patents to the Company in exchange for $50,000. Under its
terms, if the Company declined to purchase the Cathlab Patents, the Patent and
License Agreement would automatically be extended for an additional nine months
for a monthly license fee of $17,099, after which the Cathlab Patents would
automatically revert back to the Company.

                                      F-16
<PAGE>   51
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company and Aberlyn entered into an equipment lease effective May 13,
1993 (the "Equipment Lease") pursuant to which the Company assigned certain
equipment as collateral to Aberlyn in consideration of $205,000. The equipment
was exclusively leased back to the Company for three years for a monthly fee of
$6,706, after which Aberlyn was required to return the equipment to the Company
in exchange for $20,500. Under the terms, if the Company opted not to purchase
the equipment, the Equipment Lease would automatically be extended for an
additional three months for a monthly payment of $7,011, after which the
equipment would automatically revert back to the Company.

     Effective August 13, 1993, the Company and Aberlyn entered into an
additional equipment lease (the "Second Equipment Lease") pursuant to which the
Company assigned certain equipment to Aberlyn in consideration of $100,000. The
equipment was exclusively leased back to the Company for three years for a
monthly fee of $3,271, after which Aberlyn was required to return the equipment
to the Company in exchange for $10,000. If the Company declined to purchase the
equipment, the term of the Second Equipment Lease was to be automatically
extended or an additional three months for a monthly payment of $3,420, after
which the equipment would automatically revert back to the Company.

     The Company and Aberlyn entered into an agreement effective March 28, 1994
whereby the terms of the Patent and License Agreement, the Equipment Lease and
the Second Equipment Lease were modified. The payment terms of the license fee
pursuant to the Patent and License Agreement were revised to semiannual payments
of $97,445 and the payment terms of the Equipment Lease were similarly revised
to semiannual payments of $39,100 and $20,281, respectively. In consideration to
Aberlyn for making these modifications, the Company issued warrants to Aberlyn
to purchase 150,000 shares of the Company's common stock at an exercise price of
$1.50 per share exercisable over a five-year period. On May 28, 1996, Aberlyn
and the Company reached an agreement to restructure the Leases which resulted in
a revised schedule of lease payments over a twenty-four month period, with the
initial payment commencing on June 1, 1996. The payments were based on an
outstanding principal amount of approximately $500,000 and total accrued
interest of approximately $148,000. In addition, 115,000 shares of common stock
were issued in payment of consulting fees, investment banking service fees and
accumulated miscellaneous expenses totaling $115,728.

     Effective November 1, 1997, the Company and Aberlyn entered into
modification agreements of the Leases which revised the schedule of lease
payments and extended the maturity date to October 1, 1998.

     On February 18, 1996, the Company and Zanett Capital, Inc. ("Zanett"), a
financial consulting firm, signed an agreement whereby Zanett agreed to help the
Company raise capital pursuant to an offshore private placement of equity.
Zanett's President and Chief Executive Officer is a member of the Company's
Board of Directors. As a retainer for availability of services by Zanett, the
Company agreed to grant Zanett warrants to purchase shares of common stock at a
rate of 1 for every 10 issued at an exercise price of $0.50 per share,
exercisable for five years from date of grant. Date of grant is the date of each
closing. During 1996 through the efforts of Zanett, the Company sold 1,250,001
shares of common stock, 1,390 shares of Series A preferred and 1,500 shares of
Series B preferred stock pursuant to Regulation S of the Securities Act of 1933,
as amended. In connection with these placements, the Company issued warrants to
purchase 811,310 shares of common stock to unrelated parties. In addition, a 10%
placement fee of approximately $319,000 has been paid to Zanett or their
designated representative.

     In September 1996, Zanett was issued a restricted exercise warrant to
purchase 25,000 shares of common stock at $.9375 in connection with the
placement of bridge financing.

     The Company does not have a policy against employing relatives. During the
years ended December 31, 1997, 1996 and 1995, the Company paid salaries and
wages to relatives of officers of the Company amounting to $7,797, $22,692, and
$51,600, respectively.

                                      F-17
<PAGE>   52
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. CAPITAL STOCK:

  Common Stock

     Pursuant to Regulation S of the Securities Act, in February 1996 the
Company sold 1,250,001 shares of common stock at a purchase price of $0.24 per
share to a group of foreign investors.

     On November 22, 1996 the shareholders approved the increase in authorized
shares of the Company's common stock from 25,000,000 to 50,000,000.

  Preferred Stock

     In December 1992, the Company created a new class of preferred stock, the
"Series B preferred stock", with an offering price of $10 per share, consisting
of 350,000 shares. As of December 31, 1992, the Company had sold 10,000 shares
of Series B preferred stock and had received gross proceeds of $100,000. During
the first quarter of 1993, an additional 277,500 shares of the Series B
preferred stock were sold netting $2,456,145. Annual cumulative 10% dividends
were payable quarterly commencing April 1, 1993.

     Pursuant to the Certificate of Incorporation, as amended, during the period
July 1993 through October 22, 1993 (the date of a public offering), all the
287,500 shares of the Series B preferred stock outstanding were converted into
1,202,773 shares of common stock. The accrued dividends thereon were converted
into 65,693 shares of common stock, and $138 was paid in cash.

     Pursuant to Regulation S of the Securities Act, in February 1996 the
Company sold 1,390 shares of its Series A convertible preferred stock, par value
$.001 per share ("Series A Preferred"), at a purchase price of $1,000 per share,
to a group of foreign investors (the "Investors"). The Series A Preferred, which
bears no dividends and confers no voting rights, is senior in priority to the
Company's other equity securities (except with the consent of a majority of the
holders of the Series A Preferred) and is convertible at any time after October
30, 1996 at the option of the holders into such number of Common Shares (the
"Series A Conversion Shares") as is equal to $1,000 divided by the lesser of (i)
$.24 or (ii) 80% of the average of closing bid price of the common stock for the
five consecutive days ending two days prior to the day the election to convert
is made (the "Conversion Price"). The number of Conversion Shares is subject to
adjustment from time to time upon the occurrence of stock splits, reverse stock
splits, and similar events. In July 1999 any outstanding shares of the Series A
Preferred will be automatically converted based on the Conversion Price then in
effect. In addition, registration rights were granted to the Investors for the
common stock issuable upon conversion of the Series A Preferred. The term of the
registration rights is three years and includes three demand registration rights
and unlimited piggyback rights. In the event that the Company conducts an
underwritten offering during such term, the number of shares offered by the
holders pursuant to a piggyback registration may be cut back on a pro rata basis
at the discretion of the managing underwriter.

     Pursuant to Regulation S of the Securities Act, in November 1996 the
Company issued units consisting of (i) 1,500 of its 1996 Series B convertible
preferred stock, par value $.001 per share (the "Series B Preferred"), and (ii)
an equal number of warrants to purchase common stock (the "Warrants") to a group
of foreign investors (the "Series B Investors") for a total purchase price of
$1,500,000, or $1,000 per unit. The proceeds of the sale were used to pay off
notes in the amount of $835,576, with the balance to be used to fund clinical
trials and for general working capital.

     The Series B Preferred, which bears no dividends and confers no voting
rights, is of equal priority to the Series A Preferred and senior in priority to
the Company's other equity securities (except with the consent of a majority of
the holders of the Series B Preferred) and is convertible at any time at the
option of the holders into a number of shares of common stock (the "Series B
Conversion Shares") based on the lesser of (i) the average of the market price
for the common stock for the ten consecutive days prior to the sixtieth day
after

                                      F-18
<PAGE>   53
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the closing date of the Series B issuance, i.e., $1.40 per share or (ii) between
70% and 86% (depending on the length of time since the closing date of the
Series B issuance) of the average of the market price for the five consecutive
days prior to the day the election to convert is made (the "Series B Conversion
Price"). The number of Series B Conversion Shares is subject to adjustment from
time to time upon the occurrence of stock splits, and similar events. In
November 1998, any outstanding shares of the Series B Preferred will be
automatically converted based on the Series B Conversion Price then in effect.
Each Warrant entitles the holder to the number of shares of common stock equal
to the quotient of $1,000 divided by the market price of the common stock on the
closing date of the Series B issuance. The exercise price of the Warrants is
equal to the average of the market price for the common stock for the ten
consecutive days prior to the sixtieth day after the closing date of the Series
B issuance. The Warrants terminate five years after issuance and the exercise
price of the warrants and the number of shares of common stock underlying the
Warrants are both subject to adjustment upon the occurrence of stock splits,
reverse stock splits, the issuance of below-market securities, and other events.
In addition to the Series B Preferred and the Warrants, the Series B Investors
were given registration rights with respect to the shares of common stock
issuable upon conversion of the Series B Preferred and exercise of the Warrants.
The term of the registration rights is three years and includes three demand
registration rights and unlimited piggyback rights. In the event the Company
conducts an underwritten offering during such term, the number of shares offered
by the holders pursuant to a piggyback registration may be cut back on a pro
rata basis at the discretion of the managing underwriter.

     As a result of Securities and Exchange Commission guidance issued in early
1997 with respect to beneficial conversion features in connection with the
issuance of convertible preferred stock, the Company was deemed to recognize
noncash preferred stock dividends totaling approximately $1.2 million in fiscal
year 1996. This amount is equivalent to the discount from the fair market value
of the common stock given to the purchasers of the Series A and B calculated as
of the date of the sale of such stock.

     Pursuant to Section 4(2) of the Securities Act, in March 1997 the Company
issued 125 shares of its Series C convertible preferred stock, par value $.001
per share (the "Series C Preferred") to Nelson Partners, an unaffiliated
investor, for a total purchase price of $2,500,000 or $20,000 per share. The
proceeds of the sale will be used to fund clinical trials, research and
development projects and general working capital. The Series C Preferred, which
bears no dividends and confers no voting rights, is of equal rank with shares of
the Series A Preferred and the Series B Preferred and senior to the Company's
other equity securities (except with the consent of the majority of the holders
of Series C Preferred). The Series C Preferred is convertible at any time on or
after 120 days after the initial date of issuance at the option of the holder
into a number of shares of common stock (the "Series C Conversion Shares") based
on a formula as defined in the purchase agreement.

     The Series C conversion price is the lesser of (i) $1.75 (adjusted if there
is a lock up in effect) or (ii) the average of the closing bid price for the
common stock for the five consecutive trading days immediately preceding the
date the election to convert is made (the "Series C Conversion Price"). The
number of Series C Conversion Shares is subject to adjustment from time to time
upon the occurrence of stock splits, reverse stock splits, and similar events.
On March 1, 2000 any outstanding shares of the Series C Preferred will be
automatically converted based on the Series C Conversion Price then in effect.

     Registration rights were conferred upon the Series C Preferred requiring
the Company to file an S-3 Registration Statement ("Registration Statement")
covering the resale of the Series C Conversion Shares on or before the ninetieth
day following the issuance date ("Scheduled Effective Date"). The Registration
Statement became effective July 25, 1997 which was after the Scheduled Effective
Date.

     The Company may at its option at any time after the 180th day and prior to
the 361st day following the issuance of the Series C Preferred, prohibit holders
of the Series C Preferred from exercising any conversion rights granted (the
"Lock-Up") when certain conditions are met. In the event the Company effects a
lock-up,

                                      F-19
<PAGE>   54
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

each holder of the Series C Preferred will be entitled to a warrant (the
"Lock-Up Warrant") exercisable for that number of shares of common stock equal
to ( 1/2) one-half of the number of shares of common stock which would have been
issuable had such holder converted, and on the last day of the lock-up period
will be entitled to an additional Lock-Up Warrant exercisable for that number of
shares of common stock equal to one-half of the number of shares of common stock
which would have been issuable had such holder converted. The exercise price of
the Lock-Up Warrant is the fixed conversion price ($1.75) that is in effect at
the time of issuance of the Lock-Up warrant, but not subject to any adjustments.

     The Company has reserved 7,642,857 shares of common stock for issuance (i)
upon conversion of the Series C Preferred, (ii) upon exercise of the warrants
and (iii) the placement warrants.

     During 1997 1,000 shares of Series B Preferred and 13 shares of Series C
Preferred were converted into 3,112,780 and 768,322 shares of common stock,
respectively.

     The board of directors is authorized to determine, prior to issuing any
such series of preferred stock and without any vote or action by the
shareholders, the rights, preferences, privileges and restrictions of the shares
of such series, including dividend rights, voting rights, terms of redemption,
the provisions of any purchase, retirement or sinking fund to be provided for
the shares of any series, conversion and exchange rights, the preferences upon
any distribution of the assets of the Company, including in the event of
voluntary or involuntary liquidation or dissolution of the Company, and the
preferences and relative rights among each series of preferred stock.

  Loss per share

     Basic loss per share and diluted loss per share for the years ended
December 31, 1997, 1996 and 1995 are the same due to the antidilutive effect the
conversion of warrants and options have on loss per share.

12. STOCK PURCHASE WARRANTS:

     Under the terms of the agreement with Aberlyn Capital Management Limited
Partnership (See Note 10), the Company issued Aberlyn and Aberlyn Holdings
Company, Inc., an affiliate of Aberlyn, warrants to purchase 15,000 and 60,000
shares of common stock, respectively, at $7.50 per share. The warrants expire in
January 1998.

     In September and October 1993 the Company issued warrants to purchase a
total of 193,500 shares of its common stock. These warrants are exercisable at
any time during the five-year period from date of issue at a per share price of
$1.00. During 1996 warrants for 2,500 shares were exercised.

     In July 1993 the Company issued stock purchase warrants to the holders of
the Series B preferred stock to purchase an aggregate of 288,203 shares of the
Company's common stock at an exercise price of $6.65 per share. The warrants
expire in June 1998.

     In August 1993 the Company issued warrants to purchase 848,002 shares of
common stock at an exercise price of $2.16 per share in connection with a 30-day
lock-up agreement upon the conversion of the Series B preferred stock on October
22, 1993. The warrants expire in 1998.

     In connection with the offering of 1,500,000 shares in October 1993, the
Company issued warrants to its underwriters to purchase 150,000 shares of common
stock at prices ranging from $2.50 to $3.60 per share. The warrants are
exercisable for five years.

     In March 1994, the Company issued warrants to purchase 20,000 shares of
common stock at $1.00 per share in connection with a loan guarantee. In June
1994, the Company issued an additional 50,000 warrants to

                                      F-20
<PAGE>   55
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

purchase common stock in connection with the renewal and extension of the note
which is due when the Company raises a minimum of $1,000,000 in new equity. The
warrants are exercisable for five years.

     In connection with the modification of the lease terms with Aberlyn in May
1996, the Company issued warrants to purchase 150,000 shares of common stock at
$1.50 per share. The warrants are exercisable for five years.

     In connection with the private placement of 552,042 shares of common stock
in January and February, 1994, the Company issued warrants to purchase 224,139
shares of common stock at $1.35 per share. The warrants are exercisable for five
years.

     In June 1994, the Company issued warrants to purchase 282,634 shares of
common stock at prices ranging from $1.00 per share to $3.60 per share. These
warrants were issued as a result of transactions during 1993 in connection with
various bridge loans and are exercisable for five years. Warrants for 8,333
shares and 105,665 shares were exercised during 1997 and 1996, respectively. One
warrant was underexercised by one share in 1996 which is thereby forfeited.

     In August 1994, in connection with a licensing agreement with Wright
Medical Technologies (See Note 5), the Company issued warrants to purchase
150,000 shares of common stock at $2.00 per share. The warrants are exercisable
for five years.

     In October 1994, the Company granted to one of its investment bankers, in
consideration for past services performed, warrants to purchase 100,000 shares
of common stock at $2.50 per share. The warrants are exercisable for five years.

     During February through April 1995, in connection with a bridge loan, the
Company issued warrants to purchase 1,374,250 shares of common stock at $.40 per
share. The warrants are exercisable for two years and were registered on an S-3
Registration Statement effective August 23, 1996. In 1997 and 1996,
respectively, 754,250 shares and 620,000 shares, have been issued in connection
with the exercise of these warrants.

     On June 16, 1995, the Board authorized warrants to Aberlyn Capital
Management Limited Partnership in order to induce Aberlyn to not accelerate the
repayment of loans in the amount of $455,298. The warrants are to purchase
100,000 shares of common stock at $.1875 per share and 100,000 shares of common
stock at $.50 per share and are exercisable for five years. An expense of
$37,500 was recorded in 1995 for the difference between the fair market value of
the stock and the warrant prices.

     In connection with the early exercise of warrants issued for bridge loans,
the Company issued warrants to purchase 132,000 shares at $.25 per share in
September 1995. Warrants for 40,000 shares were exercised in 1997 and in 1996,
respectively. The remaining warrant for 12,000 shares expired September 1997.

     Warrants to purchase 20,000 shares of common stock at an exercise price of
$.50 per share were issued in connection with the settlement of litigation in
September 1995, exercisable for two years. The warrant expired in 1997.

     In connection with the issuance of promissory notes in September 1996, the
Company issued warrants to purchase an aggregate of 250,000 shares of the
Company's common stock (the "Bridge Warrants") and certain registration rights
in connection with such stock. The Bridge Warrants, issued pursuant to
Regulation S of the Securities Act, have a term of five years from the date of
issuance and an exercise price equal to the lowest market price for the common
stock during the period beginning on the day prior to the date of issuance and
ending on the earlier of (i) 180 days thereafter or (ii) the day prior to the
date of exercise. The exercise price of the Bridge Warrants and the number of
shares of common stock underlying the Bridge Warrants are both subject to
adjustment upon the occurrence of stock splits, reverse stock splits, the
issuance of below-market securities, and other events. In addition, the lenders
were given registration rights with

                                      F-21
<PAGE>   56
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

respect to the shares of common stock issuable upon exercise of the Bridge
Warrants. The term of the registration rights is three years and includes three
demand registration rights and unlimited piggyback rights. In the event the
Company conducts an underwritten offering during such term, the number of shares
offered by the holders pursuant to a piggyback registration may be cut back on a
pro rata basis at the discretion of the managing underwriter.

     In connection with a consulting agreement, the Company issued warrants to
purchase 836,310 shares of common stock at prices ranging from $0.50 to $1.40
for fees in connection with the Series A Preferred, Series B Preferred and
bridge loan financing and are exercisable for five years from date of grant.
Warrants to purchase 1,209,677 shares at $1.40 were issued in connection with
the issuance of Series B Preferred Stock, exercisable for five years.

     In December 1996 warrants to purchase 25,000 shares of common stock at
$1.50 per share were issued for fees in connection with a short-term loan. The
warrants are exercisable for five years.

     Cumulative shares issuable under warrants and their expiration dates as of
December 31, 1997 are as follows:

<TABLE>
<CAPTION>
                                                      EXPIRATION    NUMBER OF    EXERCISE
                     GRANT DATE                          DATE        SHARES       PRICE
                     ----------                       ----------    ---------    --------
<S>                                                   <C>           <C>          <C>
January 1993........................................     1998          75,000    $  7.50
June - October 1993.................................     1998         329,064    $  1.00
July 1993...........................................     1998         288,203    $  6.65
October 1993........................................     1998         848,002    $  2.16
October 1993........................................     1998         135,571    $  3.60
October 1993........................................     1998          45,000    $  2.50
January - February 1994 ............................     1999         224,139    $  1.35
March 1994..........................................     1999         150,000    $  1.50
March - June 1994...................................     1999          70,000    $  1.00
August 1994.........................................     1999         150,000    $  2.00
October 1994........................................     1999         100,000    $  2.50
June 1995...........................................     2000         100,000    $0.1875
June 1995...........................................     2000         100,000    $  0.50
February 1996.......................................     2001         704,167    $  0.50
September 1996......................................     2001         275,000    $0.9375
November 1996.......................................     2001       1,209,677    $  1.40
November 1996.......................................     2001         107,143    $  1.40
December 1996.......................................     2001          25,000    $  1.50
                                                                    ---------
                                                                    4,935,966
                                                                    =========
</TABLE>

                                      F-22
<PAGE>   57
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. STOCK OPTIONS:

     At December 31, 1997, the Company had two stock-based compensation plans
which are described below. Additionally, the Company has issued options that are
not part of these plans to various employees and consultants (the "Other Plan").
The Company applies APB Opinion 25 and related interpretations in accounting for
options issued to employees and directors. Options issued to consultants and
other non-employees are recorded at fair market value. The compensation cost
that has been charged against income for its stock option plans was
approximately $122,781, $238,000 and $98,000 for 1997, 1996 and 1995,
respectively. Had compensation cost for the Company's two stock-based
compensation plans and Other Plan been determined consistent with Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                    YEAR                         1997           1996           1995
                    ----                      -----------    -----------    -----------
<S>                                           <C>            <C>            <C>
Net loss
  As reported...............................  $(2,774,203)   $(2,625,116)   $(1,404,384)
  Pro forma.................................  $(3,172,810)   $ 3,052,824    $(1,866,595)
Net loss available to common shareholders
  As reported...............................  $(2,774,203)   $(3,808,529)    (1,404,384)
  Pro forma.................................  $(3,172,810)   $(4,236,237)    (1,866,595)
Net loss per common share
  As reported...............................  $      (.18)   $      (.34)   $      (.15)
  Pro forma.................................  $      (.20)   $      (.37)   $      (.20)
</TABLE>

     The Company's fixed option plans include the 1996 Incentive Stock Option
Plan (the "1996 Plan"), the 1994 Stock Option Plan (the "1994 Plan") and the
Other Plan. Effective June 30, 1997 the Board terminated the 1990 and the 1992
Stock Option Plans. There were no outstanding options at the time of
termination. Options under the plans, except the Other Plan, generally vest 20%
per year over five years after one year of service and have a maximum term of
ten years. Options under the Other Plan vest over various periods ranging from
immediate to three years.

     The 1996 Plan provides for the grant of (i) stock options, including
incentive stock options and non-qualified stock options, (ii) shares of
restricted stock, (iii) performance awards payable in cash or common stock, (iv)
shares of phantom stock, (v) stock bonuses, and (vi) cash bonuses (collectively,
the "Incentive Awards"). As of December 31, 1997, 78,000 shares of common stock
and options to purchase 330,000 shares have been granted to consultants and
options to purchase 905,000 shares have been granted to employees. The number of
shares of common stock subject to the 1996 Plan is 1,500,000 and is effective
October 10, 1996 as approved by the stockholders at the annual meeting held
November 22, 1996. The 1996 Plan will terminate October 10, 2006 unless earlier
terminated by the Company.

     Under the 1994 Plan, options to purchase an aggregate of 1,500,000 shares
are available for grants to employees and consultants of the Company and its
subsidiaries. The 1994 Plan will terminate on April 8, 2004 unless terminated
earlier by the Company.

     In April 1995, in consideration for termination of a distribution
agreement, the Company granted a distributor an option to purchase 437,500
shares at $.40 per share.

     In connection with his employment in 1995 as President and CEO, the Company
granted Steven B. Rash options to purchase 600,000 shares of common stock at
$.50 per share vesting at various times during his three-year contract. The
options are exercisable through 2002.

                                      F-23
<PAGE>   58
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In connection with a consulting agreement, the Company issued options to
purchase 100,000 shares at $.001 per share and 300,000 shares at $.56 per share
to a medical consultant in December 1995, exercisable for ten years. The options
are exercisable through 2005.

     In connection with their employment in 1996, the Company granted hiring
options to three employees for a total of 115,000 at exercise prices ranging
from $.50 to 1.25 which equaled fair market value at the time of issuance.
During 1997 options to purchase 30,000 shares were forfeited due to termination
of employment and failure to exercise within the required time frame. The
options are exercisable for five years.

     In connection with settlement agreements, the Company granted options to
purchase 225,000 shares of common stock to Lawrence M. Hoffman and 150,000
shares of common stock to a former officer at an exercise price of $.6875. The
options are exercisable through 1999 and 1998, respectively.

     In connection with a consulting agreement, the Company issued options to
purchase 60,000 shares of stock at $1.00 exercisable for two years.

     The Company granted options to purchase common stock totaling 93,000 shares
as a retainer to each of its four directors and for attendance at the Board of
Directors meetings during 1997. The options are exercisable for five years at an
exercise price ranging from $0.46875 o $1.3125 which equaled fair market value
at the time of issuance.

     In connection with his employment agreement in December 1997 as Vice
President, Sales and Marketing, the Company granted Marshall Kerr options to
purchase 100,000 shares at $.50 and 200,000 shares at $0.42 vesting at various
times during his two-year contract and expiring December 2000.

                                      F-24
<PAGE>   59
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the status of the Company's stock options granted to employees
as of December 31, 1997, December 31, 1996 and December 31, 1995 and the changes
during the year ended on these dates is presented below:

<TABLE>
<CAPTION>
                                                 EMPLOYEE STOCK OPTIONS
                        ------------------------------------------------------------------------
                                 1997                     1996                     1995
                        ----------------------   ----------------------   ----------------------
                                      WEIGHTED                 WEIGHTED                 WEIGHTED
                        # SHARES OF   AVERAGE    # SHARES OF   AVERAGE    # SHARES OF   AVERAGE
                        UNDERLYING    EXERCISE   UNDERLYING    EXERCISE   UNDERLYING    EXERCISE
                          OPTIONS      PRICES      OPTIONS      PRICES      OPTIONS      PRICES
                        -----------   --------   -----------   --------   -----------   --------
<S>                     <C>           <C>        <C>           <C>        <C>           <C>
Outstanding at
  beginning of the
  year................   1,165,476     $0.98      2,872,194     $0.78      2,354,984     $0.88
Granted
  at-a-discount.......     381,000     $1.67         15,000     $0.67        663,110     $0.42
Granted-at-the-money...    912,000     $0.52              0       n/a        500,000     $0.36
Granted-at-a-premium...      5,000     $0.96        110,000     $0.55              0       n/a
Total options
  granted.............   1,298,000     $0.65        125,000     $0.93      1,163,110     $0.48
Exercised.............      20,000     $0.19        101,000     $1.00              0       n/a
Forfeited.............      31,200     $1.04      1,410,618     $0.21        145,900     $1.00
Expired...............     412,276     $1.69        320,100     $2.53        500,000     $0.50
Outstanding at end of
  year................   2,000,000     $0.63      1,165,476     $0.98      2,872,194     $0.78
Exercisable at end of
  year................     389,180     $0.69        645,476     $1.31      1,983,312     $0.63
Weighted-average FV of
  options granted
  at-a-discount.......          $0.55                    $0.66                    $0.42
Weighted-average FV of
  options granted
  at-the-money........          $0.52                     n/a                     $0.36
Weighted-average FV of
  options granted
  at-a-premium........          $0.96                    $0.55                     n/a
Weighted-average FV of
  all options
  granted.............          $0.52                    $0.57                    $0.39
</TABLE>

     The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:

<TABLE>
<CAPTION>
                      ASSUMPTION                         1997      1996       1995
                      ----------                        ------    -------    -------
<S>                                                     <C>       <C>        <C>
Expected Term.........................................    4.82       3.18       3.45
Expected Dividend Yield...............................    0.00%      0.00%      0.00%
Expected Volatility...................................   95.00%    109.48%    109.48%
Risk-Free Interest Rate...............................    6.29%      6.01%      5.88%
</TABLE>

                                      F-25
<PAGE>   60
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes information about employee stock options
outstanding at December 31, 1997:

<TABLE>
<CAPTION>
                                    OPTIONS OUTSTANDING
                        --------------------------------------------
                                                          WEIGHTED           OPTIONS EXERCISABLE
                                                           AVERAGE      -----------------------------
                          NUMBER          WEIGHTED        REMAINING       NUMBER          WEIGHTED
       RANGE OF         OUTSTANDING       AVERAGE        CONTRACTUAL    EXERCISABLE       AVERAGE
   EXERCISE PRICES      AT 12/31/97    EXERCISE PRICE       LIFE        AT 12/31/97    EXERCISE PRICE
   ---------------      -----------    --------------    -----------    -----------    --------------
<S>                     <C>            <C>               <C>            <C>            <C>
$0.42 to $0.99........   1,850,000         $0.58            7.79          291,980          $0.51
$1.00 to $2.99........     145,000         $1.04            3.79           93,200          $1.06
$3.00 to $5.00........       5,000         $5.00            5.20            4,000          $5.00
                         ---------         -----            ----          -------          -----
$0.42 to $5.00........   2,000,000         $0.63            7.49          389,180          $0.69
</TABLE>

                          NON-EMPLOYEES STOCK OPTIONS

     A summary of the status of the Company's stock options granted to
non-employees as of December 31, 1997, December 31, 1996, and December 31, 1995
and the changes during the year ended on these dates is presented below:

                          STOCK OPTIONS -- CONSULTANTS

<TABLE>
<CAPTION>
                                            1997                     1996                     1995
                                   ----------------------   ----------------------   ----------------------
                                                 WEIGHTED                 WEIGHTED                 WEIGHTED
                                   # SHARES OF   AVERAGE    # SHARES OF   AVERAGE    # SHARES OF   AVERAGE
                                   UNDERLYING    EXERCISE   UNDERLYING    EXERCISE   UNDERLYING    EXERCISE
                                     OPTIONS      PRICES      OPTIONS      PRICES      OPTIONS      PRICES
                                   -----------   --------   -----------   --------   -----------   --------
<S>                                <C>           <C>        <C>           <C>        <C>           <C>
Outstanding at beginning of the
  year...........................   1,572,500     $1.70      1,790,167     $1.03        957,667     $1.60
  Granted at-a-discount..........      60,000     $1.00        435,000     $0.73        537,500     $0.33
  Granted at-the-money...........           0       n/a              0       n/a          5,000     $0.25
  Granted at-a-premium...........     270,000     $1.00              0       n/a        300,000     $0.56
Total options granted............     330,000     $1.00        435,000     $0.73        842,500     $0.41
Exercised........................           0       n/a         96,000     $1.00              0       n/a
Forfeited........................           0       n/a              0       n/a              0       n/a
Expired..........................           0       n/a        556,667     $1.70         10,000     $4.00
Outstanding at end of year.......   1,902,500     $0.76      1,572,500     $1.70      1,790,167     $1.03
Exercisable at end of year.......   1,722,500     $0.73      1,422,500     $0.72      1,490,167     $1.12
Weighted-average FV of options
  granted at-a-discount..........          $0.81                    $0.67                    $0.29
Weighted-average FV of options
  granted at-the-money...........           n/a                      n/a                     $0.16
Weighted-average FV of options
  granted at-a-premium...........          $0.34                     n/a                     $0.35
Weighted-average FV of all
  options granted................          $0.42                    $0.67                    $0.31
</TABLE>

                                      F-26
<PAGE>   61
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes information about non-employees stock
options outstanding at December 31, 1997:

<TABLE>
<CAPTION>
                                       OPTIONS OUTSTANDING
                            ------------------------------------------
                                                            WEIGHTED         OPTIONS EXERCISABLE
                                                             AVERAGE     ----------------------------
                              NUMBER         WEIGHTED       REMAINING      NUMBER         WEIGHTED
                            OUTSTANDING      AVERAGE       CONTRACTUAL   EXERCISABLE      AVERAGE
 RANGE OF EXERCISE PRICES   AT 12/31/97   EXERCISE PRICE      LIFE       AT 12/31/97   EXERCISE PRICE
 ------------------------   -----------   --------------   -----------   -----------   --------------
<S>                         <C>           <C>              <C>           <C>           <C>
$0.01 to $0.99............   1,212,500        $0.50            3.89       1,212,500      $    0.50
$1.00 to $3.00............     690,000        $1.22            5.30         510,000      $    1.29
                             ---------        -----            ----       ---------      ---------
$0.01 to $3.00............   1,902,500        $0.76            4.40       1,722,500      $    0.73
</TABLE>

     The fair value of each non-employee stock option granted is estimated on
the date of grant using the Black-Sholes option-pricing model with the following
weighted-average assumptions:

<TABLE>
<CAPTION>
                        ASSUMPTION                          1997      1996      1995
                        ----------                          -----    ------    ------
<S>                                                         <C>      <C>       <C>
Expected Term.............................................   5.00      1.26      3.69
Expected Dividend Yield...................................   0.00%     0.00%     0.00%
Expected Volatility.......................................  95.00%   109.48%   109.48%
Risk-Free Interest Rate...................................   6.15%     5.61%     6.10%
</TABLE>

                                      F-27
<PAGE>   62
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. SUPPLEMENTAL INFORMATION FOR CONSOLIDATED STATEMENT OF CASH FLOWS:

<TABLE>
<CAPTION>
                                                                                            INCEPTION
                                               YEAR            YEAR            YEAR        SEPTEMBER 4,
                                              ENDED           ENDED           ENDED          1984, TO
                                           DECEMBER 31,    DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                               1997            1996            1995            1997
                                           ------------    ------------    ------------    ------------
<S>                                        <C>             <C>             <C>             <C>
Interest Paid............................    $108,660       $  392,580       $178,156       $1,255,538
Noncash investing and financing
  activities:
  Equipment acquired through capital
     lease Agreements....................                                                      266,539
  Equipment and leasehold improvements
     Acquired through notes payable......                                                       35,775
Conversion of accrued interest payable to
  Principal on notes payable to
  Stockholders...........................                                      26,800          105,170
Conversion of Series A and Series B
  Preferred stock to common stock........                                                          444
Conversion of 1996 Series B and Series C
  Preferred stock to common stock........   1,260,000                                        1,260,000
Conversion of debentures to common
  stock..................................                                                      640,000
Deferred offering costs incurred in prior
  year charged against offering
  proceeds...............................                                                       41,000
Issuance of common stock in connection
  with Purchase of assets of VMS, Inc....                                                      124,999
Issuance of common stock in connection
  with Purchase of assets of Superstat,
  Inc....................................                                                       81,819
Conversion of notes payable to common
  Stock..................................                      488,671                         538,671
Common stock and warrants issued in lieu
  of Interest............................                       58,139                       1,387,300
Patent assignment and leaseback..........                                                      500,000
Issuance of common stock in connection
  with Therex settlement.................                                                           77
Transfer of note receivable from
  officer................................                                                       25,000
Write-up of property and equipment on
  Cathlab due to sale and leaseback
  Agreement..............................                                                      221,616
Issuance of common stock and warrants for
  Services...............................      28,280          367,500         56,412        1,035,707
Issuance of common stock for certain
  Liabilities............................     178,114        1,546,509                       1,724,623
</TABLE>

15. SALES INFORMATION:

     During the year ended December 31, 1997 sales to one customer represented
16.9% of the Company's total net sales. The remainder of net sales to any one
customer were less than 10%. Sales to three customers during the year ended
December 31, 1996 represented 18.7%, 18.2% and 12.9% of net sales while sales to
three customers during 1995 represented 24.8%, 20.2% and 19.4% of net sales. The
loss of any of these major accounts would be material to the Company's overall
results of operations, financial position and cash flows.

     Foreign export net sales for 1997, 1996 and 1995 were approximately 62%,
55% and 81%, respectively.

                                      F-28
<PAGE>   63
                      AMERICAN BIOMED, INC. AND SUBSIDIARY
                        (A DEVELOPMENT STAGE ENTERPRISE)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. ACQUISITION AND PURCHASE AGREEMENTS:

     During October 1992, the Company acquired the assets of SuperStat, Inc.
("SuperStat") in exchange for 18,182 shares of the Company's common stock,
valued at $81,819. Superstat has developed a patented modified collagen
hemostatic sponge for use to control bleeding in vascular and general surgery.

     In March 1995, under an agreement with SuperStat, the Company transferred
the license agreement to BioCell, Inc. and was relieved of the obligation to pay
royalties in consideration of receiving a .5% royalty on future product sales by
BioCell, Inc.

17. SUBSEQUENT EVENT:

     From January 26 through March 16, 1998 the Company issued 920,696 shares of
common stock through private placements to accredited investors. The share price
ranges from $0.34-$0.43 for a total of $331,000.

18. OPERATIONS:

     The Company has incurred recurring operating losses and negative cash flow.
In order to continue as a going concern, the Company must raise additional
capital and ultimately achieve profitable operations. Though still a
developmental stage company engaged in the development, manufacture and
marketing of medical devices, the Company has ten products presently available
to market and has comprehensive business strategy which it believes will enable
it to capitalize on its technologies and developing trends in the healthcare
industry. Management believes it will be able to raise the capital necessary to
fund the commercialization of its existing technologies and current working
capital for the foreseeable future by "unbundling" its core technologies and
identifying a strategic partner for each technology and product in a specific
international market.

     The Company's strategic plan consists of focusing on increased market
penetration of its ten existing FDA-approved products, continuing to revamp its
distribution network, continuing to focus on the commercialization of its core
technologies by pursuing US and international regulatory approval, aggressively
pursuing the sale of ancillary technology to meet future cash requirements and
to validate the proprietary nature of its technologies and continuation of
efforts to identify and pursue strategic alliances.

     Management believes that the Company is now positioned to capitalize on its
silicone manufacturing expertise and patented minimally invasive technologies.
Since receiving ISO 9001 certification in January 1998, the Company has received
unsolicited requests to manufacture unique devices to the specifications of
third parties, indicating growth potential in the OEM market. One OEM contract
for 100,000 units per year is currently in force and another incorporating the
manufacture of nine separate product lines is being negotiated.

     In addition, during 1997, management has undertaken efforts to identify
healthcare companies with similar technologies or companies seeking new
proprietary products to strengthen their existing market position. This strategy
is directed toward the formation of strategic alliances, joint venture
arrangements, licensing and distribution agreements, and research and
development agreements and projects. An integral part of this on-going strategy
is to aggressively pursue the sale of all ancillary technology which will enable
the Company to focus its resources exclusively on its core technologies and
commercial non-angioplasty balloon catheter products. Although there can be no
assurances, the Company does not foresee any risks associated with these
initiatives.

                                      F-29
<PAGE>   64

                     AMERICAN BIOMED, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
American BioMed, Inc.

     Our report on the consolidated financial statements of American BioMed,
Inc. and Subsidiaries (a development stage enterprise), which refers to
substantial doubt regarding the Company's ability to continue as a going
concern, is included on Page F-2 in this Form 10-K. In connection with our
audits of such consolidated financial statements, we have also audited the
related consolidated financial statement schedule listed in the index on Page
F-1 of this Form 10-K.

     In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information required to be included therein.

                                            COOPERS & LYBRAND L.L.P.

Houston, Texas
March 31, 1998

                                      F-30
<PAGE>   65

                                                                     SCHEDULE II

                     AMERICAN BIOMED, INC. AND SUBSIDIARIES

                       VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
          COLUMN A             COLUMN B       COLUMN C       COLUMN D      COLUMN E       COLUMN F
                                                    ADDITIONS
                                            --------------------------
                                                               (2)
                              BALANCE AT        (1)         CHARGED TO
                              BEGINNING      CHARGED TO       OTHER                      BALANCE AT
                                  OF           COSTS        ACCOUNTS-     DEDUCTIONS-      END OF
        DESCRIPTION             PERIOD      AND EXPENSES     DESCRIBE      DESCRIBE        PERIOD
        -----------           ----------    ------------    ----------    -----------    ----------
<S>                           <C>           <C>             <C>           <C>            <C>
DECEMBER 31, 1995
  Allowance for doubtful
     accounts...............  $  17,588      $   51,919                     $24,027(1)   $   45,480
  Allowance for deferred tax
     assets.................  6,522,000         314,000                                   6,836,000
DECEMBER 31, 1996
  Allowance for doubtful
     accounts...............     45,480          13,238                       1,218(1)       57,500
  Allowance for deferred tax
     assets.................  6,836,000       1,159,000                                   7,995,000
DECEMBER 31, 1997
  Allowance for doubtful
     accounts...............     57,500          68,721                      69,054(1)       57,167
  Allowance for deferred tax
     assets.................  7,995,000         832,000                                   8,827,000
</TABLE>

---------------

(1) Write-off of bad debts.

                                      F-31
<PAGE>   66

                                   SIGNATURES

     Pursuant to the Requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of The
Woodlands, State of Texas, on the 31st day of March, 1998.

                                            AMERICAN BIOMED, INC.

                                            By:     /s/ STEVEN B. RASH
                                              ----------------------------------
                                                        Steven B. Rash
                                                    Chairman of the Board

     Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.

<TABLE>
<C>                                                    <S>                             <C>
                 /s/ STEVEN B. RASH                    Chairman of the Board,           March 31, 1998
-----------------------------------------------------  President and Chief Executive
                   Steven B. Rash                      Officer

               /s/ COLENE BLANKINSHIP                  Controller (Principal            March 31, 1998
-----------------------------------------------------  Financial and Accounting
                 Colene Blankinship                    Officer)

               /s/ LAWRENCE M. HOFFMAN                 Director                         March 25, 1998
-----------------------------------------------------
                 Lawrence M. Hoffman

                                                       Director                         March   , 1998
-----------------------------------------------------
                   Richard Serbin

                /s/ CLAUDIO GUAZZONI                   Director                         March 30, 1998
-----------------------------------------------------
                  Claudio Guazzoni
</TABLE>
<PAGE>   67

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                             DESCRIPTION OF EXHIBIT
        -------                             ----------------------
<C>                      <S>
          2.1            -- Agreement and Plan of Merger among American BioMed, Inc.,
                            ABI Acquisition, Inc. and Cathlab Corporation dated March
                            30, 1992(3)
          3.1            -- Certificate of Incorporation(1)
          3.2            -- By-laws(1)
          3.3            -- Certificate of Designations, Preferences and Rights of
                            1996 Series A Convertible Preferred Stock(5)
          3.4            -- Certificate of Designations, Preferences and Rights of
                            1996 Series B Convertible Preferred Stock(5)
          3.5            -- Certificate of Designations, Preferences and Rights of
                            1997 Series C Convertible Preferred Stock
          4.2            -- Specimen Common Stock Certificate(1)
         10.17           -- Summers Note, dated September 1990, between the Company
                            and David P. Summers, as amended(1)
         10.28           -- 1992 Stock Option Plan of the Company and forms of
                            incentive stock option agreement and non-qualified stock
                            option agreement(2)
         10.57           -- Patent License, Research & Development Agreement between
                            Wright Medical Technology, Inc. and American BioMed,
                            Inc.(2)
         10.69           -- Stipulation of Settlement, Scott Printing Corporation v.
                            American BioMed, Inc.(4)
         10.70           -- Employment contract with Steven B. Rash(4)
         10.71           -- Purchase of Technology Agreement, Guerbet, S.A.(4)
         10.80           -- 1996 Incentive Stock Option Plan(6)
         10.81           -- Aberlyn Schedule No. 3 to Master Lease Agreement No.
                            0001E and Patent Schedule No. 2 to Patent Assignment and
                            License Agreement No. 0001P, effective June 1, 1996(7)
         10.82           -- Securities Purchase Agreement, dated February 20, 1996,
                            between the Company and certain investors relating to the
                            issuance and sale of Common Stock and 200 shares of the
                            1996 Series A Convertible Preferred Stock(8)
         10.83           -- Securities Purchase Agreement, dated February 20, 1996,
                            between the Company and certain investors relating to the
                            issuance and sale of 1,190 shares of the 1996 Series A
                            Convertible Preferred Stock(8)
         10.84           -- Form of Registration Rights Agreement, dated February 20,
                            1996, between the Company and holders of the 1996 Series
                            A Convertible Preferred Stock(8)
         10.85           -- Securities Purchase Agreement, dated November 7, 1996,
                            between the Company and certain investors relating to the
                            issuance and sale of the 1996 Series B Convertible
                            Preferred Stock(8)
         10.86           -- Form of Registration Rights Agreement, dated November 7,
                            1996, between the Company and holders of the 1996 Series
                            B Convertible Preferred Stock(8)
         10.87           -- Securities Purchase Agreement, dated March 21, 1997,
                            between the Company and certain investors relating to the
                            issuance and sale of the 1997 Series C Convertible
                            Preferred Stock(8)
         10.88           -- Registration Rights Agreement, dated March 21, 1997,
                            between the Company and holders of the 1997 Series C
                            Convertible Preferred Stock(8)
         10.89           -- Lease Agreement dated June 19, 1997 between the Company
                            and Woodlands Office Equities -- '95 Limited
         10.90           -- Modification Agreement -- Patent Schedule No. 002 between
                            Aberlyn Capital Management Co., Inc. and the Company
</TABLE>
<PAGE>   68

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                             DESCRIPTION OF EXHIBIT
        -------                             ----------------------
<C>                      <S>
         10.91           -- Modification Agreement -- Lease Schedule No. 003 between
                            Aberlyn Capital Management Co., Inc. and the Company
         10.92           -- Employment agreement with Marshall Kerr
         11.1            -- Computation of (Loss) per Common Share
         21.1            -- Subsidiaries of the Registrant(7)
         23.1            -- Consent of Coopers & Lybrand L.L.P.
         27              -- Financial Data Schedule
</TABLE>

---------------

(1)  Incorporated by reference to the Company's Registration Statement on Form
     S-1, as amended, File No. 33-424372, dated August 4, 1992.

(2)  Incorporated by reference to the Company's Annual Report on Form 10-K for
     the year ended December 31, 1994.

(3)  Incorporated by reference to the Company's Current Report on Form 8-K for
     April 30, 1992.

(4)  Incorporated by reference to the Company's Annual Report on Form 10-K for
     the year ended December 31, 1995.

(5)  Incorporated by reference to the Company's Quarterly Report on Form 10-Q
     for the quarter ended September 30, 1996.

(6)  Incorporated by reference to the Company's Proxy Statement for the November
     22, 1996 Annual Meeting.

(7)  Incorporated by reference to the Company's Annual Report on Form 10-K for
     the year ended December 31, 1996.

(8)  Incorporated by reference to the Company's Annual Report on Form 10-K/A-1
     for the year ended December 31, 1996.